Q1 2025 Market Commentary

Market Overview 1Q25

Markets began the year on solid footing but lost momentum by mid-February as renewed trade tensions resurfaced and volatility returned. The dominant themes of 2024 began to unwind, with market leadership narrowing and investor sentiment shifting. The S&P 500 Index declined -4.27% in the first quarter, marking its worst relative performance versus international equities in a first quarter since 1987.[1] The tech-heavy Nasdaq fell -10.4%, with the “Magnificent Seven” down approximately -15% on a cap-weighted basis.[2]   

As a result, Q1 was defined by a pronounced underperformance of Growth relative to Value—the widest quarterly performance gap since Q1 2001. Notably, the remainder of the S&P 500 (ex-Magnificent Seven) posted a modest gain of +0.4%, underscoring the narrow breadth of the downturn.

Globally, equities as measured by the MSCI ACWI declined -1.32%, cushioned in part by U.S. dollar weakness.[3] The dollar depreciated by 4%—its worst quarterly start since the 2008 financial crisis—providing a relative tailwind to international markets.[4]

After a weak start to the quarter, bonds rallied strongly amid growing policy uncertainty and concerns about a slowing economy. The Bloomberg U.S. Aggregate Bond Index gained +2.78% for the quarter.[5] The 10-year U.S. Treasury yield, which briefly touched 5.00% early in the year on optimism surrounding pro-growth policy under the new Trump administration, reversed course as economic uncertainty mounted.  Longer-duration bonds led the rally underscoring their diversification benefits during periods of elevated market risk.

The Federal Reserve held its policy rate steady at its March meeting. While acknowledging that economic activity remained solid, the Committee noted that inflation remained somewhat elevated. As of quarter-end, the consensus expectation remained for two quarter point rate cuts in 2025. However, the unexpected announcement of broad-based tariffs in early April has raised the possibility of a more accommodative path.

Current Positioning: Navigating Policy Shocks and Positioning for Opportunity

At the end of last year, we noted that early 2025 could bring volatility as markets adjusted to new leadership. That expectation has now clearly materialized.  As we enter the second quarter, we maintain a neutral positioning relative to our strategic global benchmarks. The economic environment reflects a blend of underlying strength and transition, now overshadowed by intensifying policy uncertainty – a force that has rapidly become a dominant market driver.

Rarely do we comment on market action this early in a quarter, but the shift into Q2 has been anything but typical. On April 2nd, in what he labeled the “Liberation Day” speech, President Trump announced a sweeping tariff package aimed at addressing the U.S. trade deficit. These actions, enacted under the International Emergency Economic Powers Act, came with a declaration that the trade deficit constituted a national emergency. While a 90-day pause was granted on most reciprocal tariffs, a universal 10% tariff on nearly all imports remains in effect, alongside significantly elevated levies on Chinese goods—some of which now total up to 145%.

The announcement sent shockwaves through global markets. While some degree of trade action had been anticipated, the scale and breadth of the measures far exceeded consensus expectations. The market’s reaction was swift and severe: the S&P 500 fell 10.5% over just two days—its fifth-worst two-day decline since World War II. Unlike prior episodes of market turmoil, such as the COVID-19 pandemic or the Global Financial Crisis, this bout of volatility is rooted not in external shocks but in domestically driven policy decisions.

Historically, however, major short-term drawdowns have often set the stage for strong long-term returns. As highlighted above, equities have tended to recover meaningfully over the subsequent 1-, 3-, and 5-year periods following the largest two-day market declines.

Furthermore, throughout the past year, we have emphasized the renewed importance of bonds as both a diversifier and a defensive anchor in portfolios. That role became clear during the first quarter and we believe it is even more vital now as uncertainty remains.

Economic Impact of Tariffs

Investor and business sentiment have deteriorated under the weight of rising uncertainty. According to the IMF, a 10% universal tariff—alongside retaliatory measures from the Eurozone and China—could reduce U.S. GDP by 1% and global GDP by approximately 0.5% through 2026. Notably, roughly half of that decline stems from sentiment effects alone.

Even so, the global economy entered this phase from a position of relative strength. U.S. corporate and household balance sheets remain healthy, earnings growth expectations were solid, unemployment is low, and inflation has been moderating. While these fundamentals may help cushion some of the impact, prolonged uncertainty raises the risk that recession probabilities drift higher over time.

At the start of the year, FactSet reported that analysts expected 14.8% year-over-year earnings growth for the S&P 500 in 2025—well above the 10-year average of 8.0%. However, those forecasts are now coming under pressure. As the economic outlook grows increasingly clouded by policy risk, we anticipate that earnings expectations will continue to adjust downward.

Technicals & Sentiment

We remain closely attuned to Technical and Investor Sentiment indicators—important tools for assessing short-term market direction. During much of Q1, technical factors improved, and while volatility remained, the global trend was directionally positive. That momentum began to weaken in March, bringing a resurgence of volatility into quarter-end.

Investor sentiment weakened notably in March, echoing a familiar pattern as trade tensions and policy uncertainty intensified. While these short-term indicators could deteriorate further, markets may be approaching a sentiment extreme. Historically, some of the most compelling long-term buying opportunities have emerged when sentiment is overwhelmingly negative—precisely when it feels most uncomfortable to invest.

Our sentiment approach is grounded in a contrarian philosophy. We generally follow the prevailing trend until sentiment reaches an extreme, at which point we begin to lean against it. When most investors are bearish, it often coincides with markets nearing a bottom. Current sentiment levels may be approaching such a point, offering a reason for cautious optimism—but if this environment lingers too long, it could give rise to negative feedback loops and deeper economic slowing.  Our base case remains that cooler heads will prevail, but the longer these trade measures persist, the more they threaten economic momentum and overall market stability.

Looking Ahead

We entered 2025 with rising optimism about an improving investment environment.  However, recent developments have reshaped the narrative, with tariffs taking center stage. The key now lies in assessing the scope, duration, and ultimate impact of these measures. We are hopeful that this proves to be a temporary disruption, and that the economic adjustment resembles a slowdown—not a sharp downturn—setting the stage for a stronger second half.

Markets are currently pricing in at least two Federal Reserve rate cuts by year-end, which could offer incremental support. However, we expect volatility to remain elevated in the near term—particularly if trade tensions escalate or policy clarity remains elusive. Without a meaningful pivot—especially from the Trump administration—markets may remain under pressure.

Our investment philosophy remains grounded in diversification and discipline—qualities that become even more essential during periods of elevated uncertainty. We follow a “weight of the evidence” approach, allowing data and disciplined analysis to drive decision-making, rather than reacting to short-term market noise. This framework helps us evaluate whether heightened volatility signals a broader economic downturn—such as a recession or simply reflects normal market fluctuations.

In the current environment, we are closely monitoring the trajectory of trade policy and its impact on risk assets. Should current tensions prove temporary, recent market dislocation may present selective opportunities. Accordingly, we see a potential to rebalance portfolios by trimming bond exposures that have outperformed this year and reallocating into equities where valuations have become more attractive. This disciplined “sell high, buy low” mindset is a core tenet of our philosophy—and a key contributor to long-term portfolio success.

We remain committed to staying objective, flexible, and forward-looking as we navigate an evolving landscape. Markets rarely move in straight lines—which is precisely when a disciplined approach can add the most value.

As always, we welcome your questions, thoughts, or interest in a deeper conversation.

DISCLOSURES

IMPORTANT DISCLOSURE INFORMATION

 This material is provided for information purposes only and should not be construed as a recommendation or investment advice, as the material does not consider the investment objectives, risk tolerance, restrictions, liquidity needs or other characteristics of any one particular investor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be direct investment, accounting, tax or legal advice to any one investor. Consult with an accountant or attorney regarding individual accounting, tax or legal advice. No advice may be rendered unless a client service agreement is in place.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any benchmark. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

New World Advisors, LLC ("New World") is a Registered Investment Advisor ("RIA") with the U.S. Securities and Exchange Commission (“SEC”). New World provides investment advisory and related services to clients nationally. New World will maintain all applicable notice filings, registrations and licenses as required by the SEC and various state regulators in which New World conducts business. New World renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.

 [1] Morningstar Direct & Ned Davis Research

[2] Ned Davis Research

[3] Morningstar Direct

[4] Ned Davis Research

[5] Morningstar Direct