Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, share quarterly market commentary and insights—diving into Q1 2025 performance, the impact of recent tariff developments, and what to expect in the quarters ahead.

The S&P 500 declined 4.3% in the first quarter of 2025, with most losses occurring in March as economic uncertainty intensified. Inflation expectations rose sharply following the announcement of broad new tariffs, and the Federal Reserve (Fed) held interest rates steady, signaling a more cautious approach amid elevated risks. Despite federal layoffs, the overall labor market remained stable, with modest job growth and low unemployment. Developed international markets, as measured by the MSCI EAFE, gained 6.9%, boosted by the European Central Bank (ECB) easing interest rates, improving economic data, and a weaker dollar. Emerging markets, as measured by the MSCI Emerging Markets Index, rose 2.9%, with strong gains in China offsetting losses experienced elsewhere. In fixed income, the Bloomberg US Universal Index increased by 2.7% thanks to falling bond yields and markets pricing in potential rate cuts later in 2025. Looking forward, tariff developments, inflation trends, and central bank decisions are likely to drive the market’s direction.

The S&P 500 fell 4.3% during the first quarter of 2025, with nearly all the loss happening in March. Throughout the quarter, economic data began to turnover. Soon after President Trump’s inauguration, he announced sweeping tariffs on most countries. Although the tariffs were not immediately enacted, the impacts were quickly felt, with long-term inflation expectations spiking to the highest level in nearly 30 years amid concerns that the tariffs will translate into higher prices. Consumer confidence plummeted during the quarter, experiencing the largest monthly decline since the COVID-19 pandemic. The Consumer Price Index (CPI), a broad measure of goods and services prices, accelerated in January then eased slightly in February, while the Personal Consumption Expenditure Price Index (PCE), the Fed’s preferred inflation measure, rose more than anticipated. The Fed met twice in Q1 and held interest rates steady after cutting at the last three meetings of 2024, noting that the central bank is in no rush to cut further. Although rates were unchanged, Fed officials noted that economic uncertainty has increased and slashed their economic outlook while hiking inflation expectations. On the labor front, mass layoffs across federal agencies lead to the highest Q1 job cut total since 2009. Still, the broader labor market showed some resilience, with overall job openings growing, but unemployment rates rising as well.
Seven of the 11 underlying sectors of the S&P 500 rose in Q1, but the margin between the quarter’s winners and losers was large. Energy was the top performer, gaining 10.2% thanks to rising global demand for oil and investor rotation into defensive sectors due to growing economic concerns. In a reversal of last year’s trend, consumer discretionary and technology were the worst performing sectors in Q1, plummeting 13.8% and 12.7%, respectively, amid declining consumer confidence and earnings growth concerns.

Although both fell, large cap stocks outpaced small cap stocks throughout the first three months of the year. After growth’s dominance in 2024, value stocks bested growth stocks during the quarter, as investors turned to more stable and defensive sectors amid economic uncertainty.

International developed markets, as measured by the MSCI EAFE Index, gained 6.9% in Q1, beating their domestic counterparts in both local and US currency terms. In the eurozone, inflation continued to decline, allowing the ECB to cut interest rates twice, ending at the lowest level in two years and signaling the ECB’s focus on growth over inflation. The STOXX 600, a broad benchmark for European stocks, reached an all-time high during the quarter. Further, despite low rates, the euro strengthened against the dollar and experienced its best weekly performance in 16 years as Germany pledged to ramp up spending for defense and infrastructure, shifting from decades of fiscal restraint.

In the United Kingdom (UK), data were more mixed. Wage growth accelerated to a six-month high, but unemployment unexpectedly rose. Inflation data published during the quarter came in slightly lower, but still the pound strengthened against the US dollar. Housing prices rose thanks to demand fueled by falling borrowing costs, and investor optimism grew as the UK appeared poised to experience minimal US tariffs. During the quarter, the UK’s 2025 economic growth forecast was halved due to higher projected unemployment and inflation, but growth projections for the following four years were upgraded.

In Japan, the Bank of Japan (BOJ) raised the policy rate once more, to the highest level since the 2008 global financial crisis. Manufacturing remained in contraction territory for the eighth consecutive month and Tokyo-area CPI, viewed as a leading indicator of nationwide price trends, came in below estimates. Still, the yen strengthened against the dollar during the quarter, on expectations that the BOJ will raise interest rates again this year.

Elsewhere, the MSCI Emerging Markets Index rose 2.9% during the first quarter. In China, the top performing country of the index, stocks rose 15.0% as DeepSeek launched a free large language model, claiming it was developed in just two months using less-powerful chips at a much smaller expense than its Western counterparts. Despite additional tariffs being applied to the country, China’s manufacturing activity expanded at the fastest pace in three months during Q1, with both new orders and purchase volumes increasing. Additionally, the Chinese government implemented substantial fiscal stimulus initiatives aimed at propping up business investment and consumer subsidies. The central bank is anticipated to continue easing monetary policy in 2025, potentially cutting interest rates to combat market uncertainty surrounding Trump’s presidency. India fell during the first two months of the quarter, experiencing its longest monthly losing streak in over 23 years, spurred on by foreign investor withdrawals, a slowing economy, and the rupee’s depreciation against the dollar. March, however, brought improving economic data, and with it, a resurgence of foreign investment, which made up for some of the earlier losses. Taiwan was the quarter’s worst performing country, plummeting 12.6% on concerns over US tariffs and trade relations.

Over the first quarter of 2025, the Bloomberg US Aggregate Index rose 2.8% and the broader Bloomberg US Universal Index increase by 2.7% as yields fell on escalating trade tensions and the expectation for the Fed to cut rates later in 2025.

The yield on the 10-year US treasury fell 0.35% during the quarter, ending at 4.23%. Short-duration yields, which are closely tied to Fed rate moves, fell concurrently, and the 2-year treasury dipped 0.36% in Q1. Although still near historic lows, credit spreads began to widen in 2025, and high yield bonds posted one of the quarter’s lower returns. Municipal bonds also struggled in Q1, posting fixed income’s only loss as an increase in supply was met with limited demand, and bond yields moved higher.

US gross domestic product (GDP) grew at an annualized rate of 2.4% over the fourth quarter of 2024, the latest period for which data are available, decelerating from the prior two quarters’ growth rates. The US economy expanded largely thanks to increases in consumer and government spending, but a decrease in investment was a partial offset. At the start of Q1, the International Monetary Fund (IMF) upgraded the US’s growth expectations for 2025, while forecasting the global economy to grow below the historical benchmark. While initial forecasts for the first quarter were optimistic, the introduction of sweeping tariffs has led to downward revisions and a potential contraction.

Employment data published throughout the first quarter showed modest growth after a robust 2024. The economy continued to add jobs and increase wages throughout the quarter, but at a slower pace. The Department of Government Efficiency (DOGE) implemented mass layoffs across federal agencies, aiming to streamline government operations, which led to the highest Q1 job cut total since 2009. Still, the unemployment rate remained relatively low, in part due to buyout programs and administrative delays.

The Fed held interest rates steady throughout Q1 after cutting three times in 2024, and implied that interest rates could be on hold for an extended period thanks to a strong economy and a mostly solid labor market. CPI accelerated in January but eased slightly in February, while the Fed’s preferred inflation measure, PCE, rose more than anticipated. In the March meeting, Chairman Powell acknowledged the increased economic uncertainty, and the central bank slashed its economic outlook while hiking inflation expectations for the year. Despite the hawkish stance, the forward-looking futures market has priced in three interest rate cuts for later this year, betting that the Fed will prioritize economic growth over lowering inflation.

The US economy has remained resilient to start the year, with strong job growth and stable consumer demand keeping recession risks at bay. However, that same strength has complicated the Fed’s path forward. Hopes for early rate cuts have faded as inflation proves stickier than expected and the Trump administration’s policy uncertainty has reintroduced volatility into financial markets. After driving over half of the S&P’s gains last year, the magnificent seven stocks have faltered in 2025. Value sectors, like utilities and energy, look poised to outperform growth sectors, as investors flock to stable investments during times of economic uncertainty. Small cap stocks remain weighed down by high financing costs and uncertainty around the Fed’s next moves.

Developed international markets continue to trade at a steep discount to US equities, offering potential upside as global growth improves or investors swap out of pricier stocks. The dollar weakened in early 2025, providing a tailwind for foreign returns and easing some of the pressure seen in recent years. European economic data has surprised to the upside, supported by falling inflation and ongoing stimulus efforts by the ECB. Japan’s economy remains on more stable footing, with corporate reforms and improving productivity trends supporting equity markets. While geopolitical risks persist, especially in energy and trade policy, relative valuations and improving fundamentals suggest international equities are relatively well-positioned compared to the US.

The emerging market outlook is mixed. India remains a standout, with strong GDP growth and investor confidence. China has announced more supportive policy measures, but the recovery remains uneven and dependent on broader government action. Recent tariff announcements by the Trump administration have sparked concerns about trade disruptions, which could further complicate the path forward for export-driven economies. Still, relative valuations remain attractive for emerging markets and investor appetite for these stocks has improved.

In fixed income, the yield curve has steepened as long-term yields remain elevated while short-term yields have moderated. The market has priced in interest rate cuts later this year, though the timeline is increasingly uncertain. Attractive yields continue to provide a cushion, making bonds an additive component of a diversified portfolio. However, bond yields could move higher if inflation expectations keep rising, making bonds diversification benefit less compelling. Credit spreads, although still tight relative to historical levels, have begun to diverge, with room to widen further this year as investors demand more compensation for taking on credit risk.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Past performance does not guarantee future results and all investments involve risk. Aldrich Wealth is an investment adviser registered with the US Securities and Exchange Commission.