During the first quarter of 2025, initial optimism in global markets was swiftly reversed as the S&P 500 fell by 4.27%, despite a strong start driven by solid economic data and manageable inflation levels. Non-U.S. developed markets significantly outperformed, with the MSCI EAFE Index gaining 6.86%. The positive outlook abruptly changed in late February as concerns grew over new tariff policies, tightening monetary conditions, and declining consumer confidence, sparking volatility and a sharp market reversal in the U.S.

President Trump’s April 2nd announcement drastically escalated tariffs, increasing the effective U.S. import rate from 2.5% to approximately 22%, marking the most aggressive protectionist shift since the early 20th century. The administration aims to bolster domestic manufacturing and address long-standing trade imbalances, notably with China, whose economic policies have been criticized for disadvantaging American workers. These tariffs, however, deviate significantly from the established global trading order, creating uncertainty, disrupting supply chains, and potentially triggering retaliatory measures, exemplified by China’s immediate 34% tariff on U.S. imports.

Looking forward, the outlook for global economic growth appears increasingly volatile and subdued. Economists anticipate that escalating trade conflicts and higher tariffs will lead to disruptions in global markets, potential recessions, and currency volatility. Central banks face a complex balancing act of addressing inflationary pressures from tariffs against the backdrop of slowing growth, resulting in probable rate cuts by the U.S. Federal Reserve. Investors should expect heightened uncertainty and more cautious market conditions, with valuations likely to remain under pressure throughout 2025.

ECONOMIC CONDITIONS:

U.S. – Growth Slowing

GDP: The GDP grew 2.5 percent in 2024, compared with 3.2 percent growth in 2023. [11,12]

LABOR: Employers added 151,000 jobs in February. Unemployment increased to an annualized 4.1 percent in February over the prior month. Wage growth rose 0.3 percent in February, as expected. [13]

HOUSING: Housing starts rose 11.2 percent in February over the prior month, driven by solid demand and limited existing inventory. Sales of existing homes rose 4.2 percent in February as buyers moved off the sidelines. The median existing home sales price was $398,400, a 3.8 percent rise from a year prior.17 New home sales rose 1.8 percent in February.

International: Showing Strength

Europe significantly outperformed the U.S. in Q1. The MSCI EAFE Index rose +8%, driven by optimism over German government spending plans under Chancellor Friedrich Merz. Financials led sector performance, benefiting from solid earnings and insulation from U.S. tariff concerns. Manufacturing activity in the eurozone returned to growth after a prolonged downturn, and the European Central Bank cut interest rates twice as inflation moderated.

U.K.: U.K. equities rose modestly, driven by large-cap financials, energy, and healthcare sectors aligned with broader European strength. However, sentiment remained fragile for small and mid-sized companies amid ongoing concerns about economic health and fiscal policy tightening.

JAPAN: Japanese equities fell during Q1 in the face of Trump’s planned 25% tariff on imported cars. Financial stocks were resilient, supported by rising Japanese government bond yields, positive inflation, wage growth data, and increased defense spending.

EQUITIES: U.S. Lags

U.S. EQUITIES: Under significantly dampened investor sentiment, U.S. equities declined in Q1 2025 after two consecutive years of strong double-digit gains. Valuations declined, with the market’s P/E ratio dropping from over 22x to about 20x. Earnings forecasts were slightly revised lower due to concerns about slower growth and potential economic impacts from trade barriers. The equal-weight S&P 500 declined only -1%, indicating broader market resilience outside of mega-cap growth names.

DEVELOPED INTERNATIONAL EQUITIES: International stocks outperformed U.S. stocks in Q1, posting one of its biggest quarters of outperformance since 2000. An anticipated increase in eurozone government spending triggered a rotation out of U.S. stocks and into Europe.

Emerging markets, benefiting from a weaker dollar and falling Treasury yields, rose moderately. China particularly gained as optimism about its AI capabilities and domestic stimulus measures attracted investors.

FIXED INCOME: Bond Rally

U.S. FIXED INCOME: U.S. Treasuries outperformed this quarter, with yields falling (and prices rising) in response to weaker economic activity data. Canada also faced tariff uncertainties, leading to falling yields, although its performance fell behind the U.S. Divergence was evident in corporate bond markets. U.S. dollar denominated bonds outperformed euro bonds on both investment grade and high yield markets.

DEVELOPED INTERNATIONAL FIXED INCOME: There was a notable shift in the global macroeconomic landscape during the first quarter of 2025. U.S. exceptionalism was challenged as heightened policy uncertainty led to a sharp fall in sentiment and raised recession concerns. In comparison, Germany’s fiscal regime change prompted a significantly improved outlook across Europe, catalyzing a marked divergence in fixed income markets. There was a partial reversal of the market weakness towards the end of the quarter as focus turned to the impact from tariffs ahead of U.S. “Liberation Day.”

QUARTERLY FOCUS: Tariff Tantrum

Marking a significant shift in U.S. trade policy, President Trump unveiled a sweeping tariff structure including a universal 10% tariff on imports from all trading partners, with higher reciprocal tariffs targeting nations with significant trade imbalances or perceived unfair trade practices. The President hit the pause button on these tariffs as the markets reacted in near chaos. However, as of this writing, a 154% tariff remains in place for China, causing severe economic uncertainty on a global level.

The immediate economic implications are meaningful. Such aggressive tariffs, if sustained, will elevate average U.S. tariff rates toward 20%-25%, levels not seen in nearly a century. This increases production costs, fuels inflation pressures, and likely dampens economic growth as businesses face higher import prices and disrupted supply chains. Consequently, corporate earnings forecasts will probably face downward revisions as firms grapple with increased input costs and uncertainty around future trade relations. Valuation multiples, already under pressure from heightened policy uncertainty, may compress further, posing additional headwinds for equity markets.

Tariffs on U.S. Imports: Average tariff rate on U.S. goods imports for consumption

 

The policy introduces significant uncertainty not only due to its economic impact but also its ambiguous duration. Although negotiations and exemptions are expected, the complexity involved in renegotiating global trade agreements means that uncertainty could persist through 2026. Additionally, the potential for retaliatory measures from impacted countries, particularly in Asia and Europe, further complicates the outlook. Countries adversely affected, such as China and Japan, could respond through their own tariff adjustments or currency policies, exacerbating global tensions and potentially leading to broader trade wars.

From a monetary policy perspective, the Federal Reserve faces a challenging balancing act between containing inflation—driven by tariff-induced price increases—and supporting economic growth amid a potential slowdown. Given these pressures, the likelihood of rate cuts may increase as the Fed prioritizes economic stability over short-term inflationary spikes. Similarly, impacted countries may implement additional fiscal stimulus measures to offset negative growth effects, a trend already seen in Europe and Asia.

DPWM OUTLOOK: The Year to Come

There’s never been a better time to curate a well-diversified portfolio with exposure to alternative investments. Until greater policy clarity emerges under this new administration, market volatility could remain elevated.

DPWM advises investors to consider reducing reliance on previously dominant large-cap technology and consumer discretionary stocks. Instead, defensive sectors such as healthcare and energy, along with domestically focused smaller companies, may offer greater resilience. European financials, industrials, and energy sectors are poised for continued relative outperformance, making them key diversifiers. Similarly, emerging markets should remain appealing due to falling U.S. Treasury yields and dollar weakness, benefiting economies like China and Brazil. Investors, however, should be selective, avoiding tariff-sensitive markets like Taiwan and India.

In fixed income, high-quality U.S. Treasury bonds remain crucial for portfolio stability, providing a hedge against equity volatility. Although credit spreads have widened slightly, they remain manageable historically, making investment-grade corporate bonds attractive for risk-adjusted returns. Investors should approach high-yield bonds cautiously, given increased economic uncertainties.

Sectors exempt from tariffs, such as semiconductors, pharmaceuticals, and critical minerals, could see relative strength. Commodities, particularly precious metals like gold, are likely to perform well amid heightened volatility and economic uncertainty, offering both diversification and inflation hedging benefits. Real assets, including infrastructure and real estate investments in resilient sectors, can provide stable cash flows less correlated with traditional asset classes. Additionally, absolute return strategies and private credit may further reduce portfolio volatility, as they exhibit low correlations with public equity and bond markets.

Successful navigation through these increasingly uncertain times will require continued emphasis on diversification across regions and asset classes enhanced by targeted allocations to alternative investments that reduce overall portfolio volatility and support long-term returns. Investors should also be poised to take advantage of market lows when able. As always, your DPWM team is here for you to answer questions and discuss your portfolio strategies.

 

 

CITATIONS:
1. WSJ.com, March 31, 2025
2. CNBC.com, January 27, 2025
3. CNBC.com, February 19, 2025
4. WSJ.com, February 28, 2025
5. WSJ.com, March 28, 2025
6. Sectorspdrs.com, March 31, 2025
7. Insight.FactSet.com, March 14, 2025
8. Insight.FactSet.com, March 10, 2025
9. Insight.FactSet.com, March 17, 2025
10. MSCI, March 31, 2025
11. MarketWatch.com, March 27, 2025
12. The Wall Street Journal, January 30, 2025
13. CNBC.com, March 7, 2025
14. Tradingeconomics.com, March 17, 2025
15. Tradingeconomics.com, March 18, 2025
16. Tradingeconomics.com, March 18, 2025
17. WSJ.com, March 20, 2025
18. KPMG.com, March 25, 2025
19. CNBC.com, March 12, 2025
20. Reuters.com, March 26, 2025
21. CNBC.com, February 11, 2025
22. WSJ.com, March 19, 2025
23. GardenPals.com, January 15, 2024
24. GoodRX.com, 2025
25. FA.gov, 2025
26. GardenCenterMag.com, September 25, 2024
27. TodaysHomeowner.com, April 21, 2024
28. CDC.gov, 2025
29. Cornell.edu, 2025