Written by: Trek Investment Committee
As we close the books on the first quarter of 2025, investors have faced a complex landscape shaped by shifting economic signals, evolving Fed policy expectations, and ongoing global uncertainties. While markets have remained generally resilient, undercurrents of volatility have emerged, particularly around transportation stocks, consumer sentiment, and geopolitical developments.
In this quarterly commentary, we’ll explore key market developments, break down the economic data, and share insight as we enter the second quarter.
Major Equity Markets in Q1 2025
The first quarter of 2025 presented a challenging environment for domestic equity markets. With a notable rotation in market leadership, investors began shifting away from the high-growth tech names that led the market in 2023 and 2024, turning instead toward value-oriented and higher-quality companies, particularly in industrials, healthcare, and consumer staples.1,2
The Dow Jones Industrial Average has been the relative outperformer among the major indices, reflecting renewed interest in defensive and dividend-paying stocks. While not immune to volatility, the Dow’s more diversified sector mix has offered a measure of stability amid shifting sentiment. The Dow Jones Average returned roughly -1.2% for the first quarter of 2025.3
In contrast, the S&P 500 is down roughly -4.5% year-to-date, weighed down by its heavy allocation to technology and communication services.4
The Nasdaq Composite has underperformed more sharply, declining about -10.4% year-to-date, as megacap tech stocks saw profit-taking and increasing scrutiny amid concerns about high valuations and slowing growth.5
Economic Indicators:
- Consumer Confidence: The Consumer Confidence Index declined to 92.9 in March 2025, marking its lowest point since 2021. The Expectations Index also dropped to 65.2, the most pessimistic level in 12 years, indicating growing consumer concerns about economic conditions.6
- Inflation and Federal Reserve Policies: The Federal Reserve maintained its benchmark interest rate but revised its economic projections, lowering the 2025 GDP growth forecast to 1.7% and raising the inflation forecast to 2.7%. These adjustments reflect concerns over the economic impact of recent trade policies and tariffs.7
Policy & Global Developments:
- Trade Policies and Tariffs: In February 2025, the Trump administration-imposed tariffs of 25% on imports from Canada and Mexico, and 10% on imports from China. These measures were implemented to address concerns over trade imbalances and illicit drug flows. The tariffs have contributed to market volatility and raised concerns about potential retaliatory measures from affected countries.8
Outlook for the Second Quarter of 2025
Markets: Searching for Stability in a Slower Growth Environment
As we head into Q2, investors are entering a more cautious phase. With the S&P 500 and Nasdaq both posting declines in Q1, and leadership shifting toward quality and value, the tone for Q2 is likely to focus on stability and earnings clarity.9
Analysts are trimming earnings forecasts, particularly in sectors exposed to higher input costs, regulatory pressures, and international trade. The S&P 500 is now projected to see earnings growth of just 7.7% year-over-year, the weakest since late 2023, as margin pressures from inflation and slower global growth start to show.9
Macroeconomy: A Delicate Balance
Federal Reserve’s Stance: The Federal Reserve’s recent policy meeting concluded with the decision to keep the interest rate unchanged at 4.25% to 4.50%. However, significant attention was drawn to the Fed’s revised economic projections, which indicated lower economic growth and higher inflation for 2025, sparking fears of stagflation.10
Stagflation Concerns: Investors are increasingly concerned about stagflation, a combination of high inflation and low economic growth, which is considered more challenging to manage than a recession. This concern arises amidst the Federal Reserve’s projections of higher inflation and slower growth, coupled with the impact of new tariffs.11
Navigating Policy-Driven Market Volatility: Insights from the 2018 Trade Conflict and Future Implications
Market volatility stemming from policy and political decisions can profoundly affect investment portfolios, often leading to significant stress for investors. The 2018 U.S.-China trade war serves as a pertinent example of how such policy-driven events can influence economic dynamics and investor sentiment.
The 2018 Trade War: Immediate Impacts and Investor Sentiment
In 2018, the U.S. imposed tariffs on approximately $350 billion of Chinese imports, with China retaliating on $100 billion of U.S. exports. This escalation led to increased market uncertainty and had tangible effects on both economies. Studies indicate that these tariffs resulted in higher prices for consumers and disrupted supply chains, contributing to a decline in trade volumes between the two nations.12
Investor sentiment during this period was notably affected. The heightened uncertainty led to increased market volatility, prompting investors to reassess their risk tolerance and, in some cases, adjust their portfolios to mitigate perceived risks.13
Potential Long-Term Outcomes: Risks and Opportunities
While the immediate effects of policy-induced market volatility can be unsettling, it’s crucial to consider potential long-term outcomes:
- Adverse Economic Impacts: Prolonged trade conflicts can lead to sustained economic downturns, affecting global supply chains and reducing economic growth. The 2018 trade war, for instance, contributed to a slowdown in global trade growth, with repercussions felt across various sectors.14
- Transformative Economic Shifts: Conversely, such conflicts can catalyze shifts towards domestic manufacturing and efforts to reduce reliance on foreign supply chains. This potential reshoring could stimulate local industries and potentially bolster sectors like domestic manufacturing, which have experienced declines in past decades. However, the realization of these benefits depends on various factors, including policy support, infrastructure readiness, and workforce capabilities.15
As we look ahead, it’s clear that the second quarter of 2025 will be shaped by a delicate balance between uncertainty and opportunity. The market’s recent rotation into value and quality names suggests investors are recalibrating their expectations amid evolving economic and policy dynamics.
While short-term volatility (particularly driven by geopolitics and trade policy) can be unnerving, it’s important to remember that markets are forward-looking. History shows us that challenging environments can also sow the seeds for longer-term transformation.
Whether the current landscape leads to a slowdown or sparks a revitalization of domestic industries, maintaining a disciplined investment approach anchored in your long-term goals is essential. As always, we encourage you to reach out to your advisor with questions or to discuss how your portfolio is positioned for what lies ahead.
Sources:
1- https://www.morningstar.com/markets/stock-market-rotation-is-underway-will-it-last?utm_source=chatgpt.com
2- https://www.advisorperspectives.com/commentaries/2024/12/27/q1-2025-equity-market-taking-stock?utm_source=chatgpt.com
3-https://www.slickcharts.com/dowjones/returns/ytd
4- https://www.slickcharts.com/sp500/returns/ytd
5- https://www.slickcharts.com/nasdaq100/returns/ytd
6- https://www.investopedia.com/is-a-recession-coming-many-consumers-think-so-11702955?
7- https://www.kcra.com/article/federal-reserve-interest-rates-inflation-forecast/64233096?
8- https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/
9- https://www.reuters.com/markets/us/first-quarter-us-earnings-outlook-looks-less-rosy-with-tariff-worries-focus-2025-03-24/
10- https://finance.yahoo.com/news/fed-holds-interest-rates-4-092957208.html
12- https://www.nber.org/system/files/working_papers/w29315/w29315.pdf
13- https://link.springer.com/article/10.1057/s41264-018-0049-6
15 https://aric.adb.org/pdf/rcipod/episode_22/GVC%20Reshoring%20Presentation.pdf
This overview presents a cautious interpretation of current economic indicators and their potential implications for investors. It’s important for investors to remember that market conditions are inherently uncertain and subject to change. The information provided here should not be considered as personalized investment advice or a prediction of future market movements. Investors are encouraged to consult with their financial advisor to discuss their individual financial situation and goals. A comprehensive investment strategy should consider the investor’s risk tolerance, investment time horizon, and any changes in economic conditions.
Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 25-183
