Market Update 4/2/2025: Q1 2025: A Tale of Two Markets
Market Commentary
Jack Ablin
By Jack Ablin, Chief Investment Officer. Subscribe for weekly market updates.
Key Observations:
Market Pivot Post-Inauguration
Tariffs and DOGE Spending Cuts Weighing on Economic Outlook
International Markets Offered Valuable Diversification
Positive Factors Remain in Place, Including Strong US Labor Market
We believe the US economy can continue to grow once trade policy uncertainty is lifted
Take an expensive stock market, combine it with policy uncertainty, and you get Q1 2025 performance. The US stock market posted its worst quarter since 2022, with the S&P 500 falling 4.6 per cent and the tech-heavy NASDAQ dropping 10.4 per cent over the first three months of the year. The pullback was fueled by concerns over the Trump administration’s tariff policies and their potential economic impact. The Russell 2000, an index of small cap stocks, shed nearly 10 per cent on the prospect of the Fed holding rates higher for longer. The only certainty when investing is uncertainty, and the time-tested way to mitigate risk is portfolio diversification.
Though US stocks suffered, not every market lost ground: international large caps gained more than seven per cent, and bonds added nearly three per cent. This was the first quarter since 2020 when bonds delivered a positive return versus stocks. The quarterly decline marks a stark contrast from the end of 2024, when the S&P 500 had completed two consecutive years of 20+ per cent gains.
Market Pivot Post-Inauguration
Q1 2025 was a tale of two markets: before the inauguration, and after the inauguration. President Trump entered office on a pro-business platform, offering to reduce taxes and red tape, which helped to extend the rally that began after the election. Since the inauguration, Trump’s stop-and-start tariff policies aimed against America’s major trading partners kept investors off balance. Market sentiment shifted from optimism about tax cuts and deregulation following Republican electoral victories to worry about tariff policy uncertainty and the impact of DOGE cuts to government spending. The Magnificent Seven rose 2.2 per cent through Inauguration Day, but plunged 18.1 per cent from Inauguration Day through the rest of the quarter as the US Policy Uncertainty Index flirted with levels not seen since the pandemic or the financial crisis.
Tariffs and DOGE Spending Cuts Weighing on Economic Outlook
Analysts are trimming growth forecasts and raising inflation estimates, stoking fears of stagflation. Cresset recently raised our recession likelihood from 10 per cent to 20 per cent a few weeks ago, although our base case remains slowing growth coupled with lower inflation. We estimate DOGE cutting will reduce US GDP growth by about 0.5 per cent this year, based on the contribution of government spending to overall growth in recent quarters.
International Markets Offered Valuable Diversification
International markets were resilient last quarter. A record shift of capital from US to European markets helped the STOXX Europe 600 outpace the S&P 500 by 9.8 percentage points. Germany’s incoming government has agreed to overhaul borrowing rules and create a €500 billion ($536 billion) infrastructure fund to revamp the military and revive growth in Europe’s largest economy. European defense stocks surged in response.
Positive Factors Remain in Place, Including Strong US Labor Market
Most S&P 500 sectors are still up for the year. The energy sector, for example, rose more than nine per cent last quarter. The US labor market is strong: the unemployment rate is 4.1 per cent and there are over 7.5 million job openings. We also believe the economy can continue to grow once trade policy uncertainty is lifted.
Bottom Line:
While last quarter’s results are disturbing, we should note that the investment landscape is always uncertain, and diversification is the most effective way to build a risk-balanced portfolio that stands the test of time. Meanwhile, investors must stay focused on the long term to let compounding work for them. Equities, over the long run, have helped investors stay ahead of inflation.
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About Cresset
Cresset is an independent, award-winning multi-family office and private investment firm with more than $65 billion in assets under management (as of 1/15/2025). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.
Market Update 4/2/2025: Q1 2025: A Tale of Two Markets
By Jack Ablin, Chief Investment Officer. Subscribe for weekly market updates.
Key Observations:
Take an expensive stock market, combine it with policy uncertainty, and you get Q1 2025 performance. The US stock market posted its worst quarter since 2022, with the S&P 500 falling 4.6 per cent and the tech-heavy NASDAQ dropping 10.4 per cent over the first three months of the year. The pullback was fueled by concerns over the Trump administration’s tariff policies and their potential economic impact. The Russell 2000, an index of small cap stocks, shed nearly 10 per cent on the prospect of the Fed holding rates higher for longer. The only certainty when investing is uncertainty, and the time-tested way to mitigate risk is portfolio diversification.
Though US stocks suffered, not every market lost ground: international large caps gained more than seven per cent, and bonds added nearly three per cent. This was the first quarter since 2020 when bonds delivered a positive return versus stocks. The quarterly decline marks a stark contrast from the end of 2024, when the S&P 500 had completed two consecutive years of 20+ per cent gains.
Market Pivot Post-Inauguration
Q1 2025 was a tale of two markets: before the inauguration, and after the inauguration. President Trump entered office on a pro-business platform, offering to reduce taxes and red tape, which helped to extend the rally that began after the election. Since the inauguration, Trump’s stop-and-start tariff policies aimed against America’s major trading partners kept investors off balance. Market sentiment shifted from optimism about tax cuts and deregulation following Republican electoral victories to worry about tariff policy uncertainty and the impact of DOGE cuts to government spending. The Magnificent Seven rose 2.2 per cent through Inauguration Day, but plunged 18.1 per cent from Inauguration Day through the rest of the quarter as the US Policy Uncertainty Index flirted with levels not seen since the pandemic or the financial crisis.
Tariffs and DOGE Spending Cuts Weighing on Economic Outlook
Analysts are trimming growth forecasts and raising inflation estimates, stoking fears of stagflation. Cresset recently raised our recession likelihood from 10 per cent to 20 per cent a few weeks ago, although our base case remains slowing growth coupled with lower inflation. We estimate DOGE cutting will reduce US GDP growth by about 0.5 per cent this year, based on the contribution of government spending to overall growth in recent quarters.
International Markets Offered Valuable Diversification
International markets were resilient last quarter. A record shift of capital from US to European markets helped the STOXX Europe 600 outpace the S&P 500 by 9.8 percentage points. Germany’s incoming government has agreed to overhaul borrowing rules and create a €500 billion ($536 billion) infrastructure fund to revamp the military and revive growth in Europe’s largest economy. European defense stocks surged in response.
Positive Factors Remain in Place, Including Strong US Labor Market
Most S&P 500 sectors are still up for the year. The energy sector, for example, rose more than nine per cent last quarter. The US labor market is strong: the unemployment rate is 4.1 per cent and there are over 7.5 million job openings. We also believe the economy can continue to grow once trade policy uncertainty is lifted.
Bottom Line:
While last quarter’s results are disturbing, we should note that the investment landscape is always uncertain, and diversification is the most effective way to build a risk-balanced portfolio that stands the test of time. Meanwhile, investors must stay focused on the long term to let compounding work for them. Equities, over the long run, have helped investors stay ahead of inflation.
About Cresset
Cresset is an independent, award-winning multi-family office and private investment firm with more than $65 billion in assets under management (as of 1/15/2025). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.