The first quarter of 2025 marked a clear turning point in the markets—a period defined by repricing risk and resetting expectations. Entering the year, both economic and market outlooks were optimistic. That optimism was reflected in elevated stock valuations, most notably the price-to-earnings (P/E) ratio of the S&P 500 reaching 27.6 in February, significantly higher than its long-term average of 19.8. The P/E ratio is a simple yet insightful valuation tool, representing the price investors are willing to pay today for $1 of a company’s earnings. High ratios indicate strong expectations for future growth.
This quarter’s repricing was driven in part by a major shift in the political and economic narrative. President Trump’s return to office brought a new wave of tariffs, trade policy changes, and global uncertainty. While these policies may potentially drive longer-term growth, their near-term impact has unsettled markets. Investors are beginning to recalibrate assumptions about consumer spending and corporate profitability under these new conditions.
The S&P 500 Index declined -4.3% for the quarter, weighed down heavily by the "Magnificent 7" technology stocks. These companies had driven much of the index’s performance over the prior two years and now represent an outsized portion of the cap-weighted index. Without them, the S&P 500 would have shown a gain of +0.5%—a stark contrast that highlights the extent of their influence.
Large-Cap value stocks emerged as a relative bright spot. After years of underperformance, many were not as richly valued as their growth-oriented peers and often offered dividend income, which provided a buffer during market pullbacks. The Russell 1000 Value Index gained +2.1%, while the Russell 1000 Growth Index fell -10.0%.
Small- and mid-cap stocks struggled, with the small-cap index falling -9.5% and mid-caps declining -3.4%. These segments tend to be more sensitive to economic shifts and rising input costs.
International markets, however, offered a rare bright spot. As U.S. trade policy became more restrictive, European and Asian economies began pursuing more independent fiscal strategies. The MSCI EAFE Index, tracking developed international markets, rose +7.0% for the quarter. Emerging markets gained +3.0%, with China up +15.1% as the country continued injecting stimulus into its post-Covid economy.
In response to market volatility and economic uncertainty, investors sought refuge in traditionally safer assets. The Bloomberg Aggregate Bond Index rose +2.8%, with notable inflows into bonds maturing in 3–5 years—roughly aligning with the expected end of President Trump’s term. Gold also saw a significant rally, climbing nearly +20% for the quarter as it gained favor over both equities and the U.S. dollar.
As of early April, the S&P 500 Index had just recorded its 19th worst two-day stretch since the 1920s—highlighting the current climate of uncertainty. These developments underscore the importance of diversification during periods of market stress. Volatility, while uncomfortable, is an expected part of long-term investing. Historically, the strongest market recoveries have often occurred immediately following the sharpest declines. Over the past 20 years, 24 of the 25 best days in the market happened within one month of one of the 25 worst days.¹
If you have any questions about your investment allocation, or how your portfolio is performing in current market conditions, please feel free to contact me.
Best,
Ted Schumann
¹Sources: BlackRock; Morningstar as of 3/31/25. “S&P 500” is represented by the S&P 500 Index from 3/4/57 to 3/31/25 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period. Index performance is for illustrative purposes only. It is not possible to invest directly in an index. Past performance does not guarantee or indicate future results.