The first quarter began with optimism carried over from the end of 2024, as investors anticipated that President Trump’s pro-growth agenda would further strengthen the U.S. economy and build on the equity market gains of the past two years. The promise of tax cuts, deregulation, and other pro-business policies initially overshadowed concerns about the protectionist trade measures Trump campaigned on. However, by February the optimism began to fade after the administration moved forward with plans to impose tariffs on key trading partners, including Canada, Mexico, and China. Business leaders, investors, and consumers grew increasingly uneasy about the potential impact of tariffs on economic growth, and financial markets responded with a pullback as sentiment waned.
The S&P 500 closed out the quarter with a total return of -4.3%. The pullback was led by the Information Technology and Consumer Discretionary sectors, with investors rotating out of the high-growth names that had dominated market leadership over the past two years. The artificial intelligence theme was already facing headwinds coming into the year; high valuations, lofty earnings expectations, and growing scrutiny over AI-related spending created a high bar for tech companies to clear. As a result, the group was especially vulnerable to a broader market pullback. While the AI-driven tech cohort led on the downside, the rest of the market showed more resilience. In fact, most sectors of the S&P 500 ended the quarter in positive territory.
International equities significantly outperformed U.S. markets during the quarter, with the MSCI All Country World ex US Index returning 5.4%. Investors looked to reduce overweight exposure to domestic stocks and sought greater geographic diversification. European stocks, in particular, benefited from relatively lower valuations, plans for increased fiscal spending, and a clearer outlook for interest rate cuts. Meanwhile, in fixed income, the Bloomberg U.S. Aggregate Bond Index returned 2.8%, as concerns about slowing economic growth and trade policy uncertainty pushed investors toward safer assets.
While trade tensions were a major focal point throughout the first quarter, the situation escalated in early April when President Trump announced sweeping tariffs of at least 10% on all imports into the U.S., with higher rates targeting countries with which the U.S. runs a trade deficit. The sharp selloff in equities and increased bond market volatility reflected not only the potential economic impact of the tariffs, but also the uncertainty surrounding how these policies will unfold. Day by day, new developments continue to emerge – from escalating tariff threats to sudden exemptions – and markets have been reacting swiftly to each headline. For the Federal Reserve, which remains focused on its fight against inflation, this shifting landscape has made decisions on interest rates even more complicated. Tariffs have the potential to push prices higher at least in the short-term while suppressing economic growth. For now, the Fed is taking a wait-and-see approach to get more clarity before deciding on its next move with interest rates.
In an unpredictable environment—marked by heightened volatility and rapidly shifting expectations—our approach is to avoid being overly reactive to short-term market swings. Instead, we remain diversified, maintain a long-term perspective, and stay opportunistic when market dislocations create compelling entry points. In times like these, distinguishing between signal and noise is essential. We continue to focus on fundamentals, stay disciplined in our process, and are committed to guiding clients through the uncertainty with clarity and perspective.