2025 | 1st Quarter
2025 First Quarter Market Commentary
Coming into the year, the bar was set high for equity markets. 2024 saw the S&P 500 hit 57 all-time highs and post back-to-back yearly gains of over 20% for the first time this century. While we entered the year with a solid economic backdrop: above-trend economic growth, a healthy labor market, strong corporate and consumer balance sheets, and analysts expecting double-digit earnings growth for the S&P 500 in 2025, there were also causes for concern: equity markets were expensive (21.5x forward earnings), index concentration was at record levels, progress on inflation was slowing, and there was uncertainty around fiscal and monetary policy.
Market concentration and trade policy were the major themes that drove performance in the first quarter. We entered the year with the top 10 stocks in the S&P 500 accounting for almost 40% of the index. The Magnificent 7 stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) were up 76% in 2023 and 48% in 2024, accounting for 63% and 55% of the S&P 500’s returns. With high expectations for earnings growth and continued investment into Artificial Intelligence, January news of Chinese AI startup DeepSeek developing a large-language model at a fraction of the cost of ChatGPT (the true cost of development was later disputed) called into question America’s dominance in AI and the hundreds of billions of dollars being invested in the AI buildout.
In a positive sign of broadening returns, despite the Technology and Consumer Discretionary sectors being down through February, the S&P 500 was still in positive territory for the year, driven by strong performance in Health Care, Financials, and Consumer Staples. Unfortunately, fiscal policy, in the form of tariffs (more on that below), led to a spike in uncertainty, soured consumer and business sentiment, and drove the markets into correction territory (down 10% from February 19th’s record highs) in March, with the S&P 500 closing down 4.3% for the quarter.
As the AI theme struggled, the Mag 7 stocks fell 14.8% for the quarter, while the other 493 names were up 0.4%. 7 of the 11 sectors in the S&P 500 saw positive performance, but it was not enough to offset weakness in the Consumer Discretionary, Technology, and Telecommunication Services sectors. Value stocks outperformed Growth by almost 12%, and Large Cap outperformed both Mid and Small Cap.
A bright spot for the quarter was International Equity, which saw its strongest quarterly outperformance vs. U.S. Equity is over 15 years. International Developed Equity rose 7% for Q1, with increased fiscal spending plans on defense and infrastructure driving returns. Emerging Markets rose 3%, driven by AI-optimism in China.
While U.S. Equities fell for the quarter, Core Bonds played their role as a diversifier. The U.S. 10-Year Treasury Yield fell 35 basis points in Q1, and the Bloomberg Aggregate Bond Index returned 2.8%. Credit spreads, priced for perfection entering the year, widened slightly, causing Investment Grade (up 2.3%) and High Yield (up 1%) to underperform the broad index.
As we entered Q2, markets were rattled by President Trump’s April 2nd announcement of reciprocal tariffs. Likely using the 2018-2019 trade war as a guide, markets severely underestimated the potential level of reciprocal tariffs. The 10% minimum tariff on all imports and reciprocal tariffs based on each country’s trade deficit with the U.S. (an equation that surprised and confused most economists) will drive the average tariff rate to 25%, higher than the Smoot-Hawley tariffs in 1930, and the highest levels since 1904. With these tariffs implemented within days of the announcement, the idea that tariffs would be used as a negotiation tool no longer stands. Countries including China and Canada have announced retaliatory tariffs, the threat of a full-blown trade war is real, and economists see recession odds as high as 60% this year.
Tariffs tend to slow growth, drive up prices, worsen inequality, decrease productivity, erode profits, and increase global tensions. While the U.S. was being tariffed at a higher rate by the rest of the world (4.6% vs. the average 2.2% we charged in 2023), our economy is driven by consumption and services. It is unlikely that we will shift towards a manufacturing/goods-producing economy that runs a trade surplus with the rest of the world, and doing so would take years.
At the time of writing, the S&P 500 has neared bear market territory (down 20% from its highs). Volatility has spiked, global equities have sold off, and credit spreads have widened. Treasury Yields have been volatile as well, with the 10-Year in a 60 basis point range over 3 days, between 3.9% and 4.5%.
While uncertainty is likely to continue to drag on consumer and business sentiment, the tariff situation is fluid and can change at a moment’s notice. The administration has received pushback from economists, financial leaders, and CEOs. Negotiations are in progress, but if done on a country-by-country basis, they will take time. A pause of tariff implementation, which will give countries time to negotiate and the administration an opportunity to adjust reciprocal tariffs, will be viewed positively by the markets.
Given the uncertainty surrounding tariffs, it is impossible to predict their ending levels and the impact they will have on economic growth and corporate profits. While trade policy is an area of the administration’s agenda that could harm economic growth, the potential for tax cuts could stimulate the economy. While sentiment has worsened, consumer and corporate balance sheets are still strong. As of April 8th, the S&P 500 was trading at 18x forward earnings, in-line with the 10-year average of 18.3x. Equities are cheaper than the start of the year, and while future earnings are more difficult to predict in this environment, the current volatility has created opportunity for long-term investors.
We understand that short-term market volatility can be concerning, but it is important as investors to focus on the long-term. There have been 27 bear markets since 1928, and one can expect to see roughly 14 in a 50-year period. Increased risk is a trade-off for the higher returns equities generate in the long-term over cash and fixed income.
In times of market stress, prior to making changes to your long-term allocation, review your financial plan and whether you are on track to meet your goals. Talk with your advisor and make sure your portfolio is aligned with both your ability and your willingness to take risk. While markets move and policies change, we hope our role and ability to serve as your trusted advisor is one constant you can count on. We are here for you in good times and volatile times, and hope you will reach out to us with any questions or concerns.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
The foregoing content reflects the opinions of Smithbridge Asset Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
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