Alert
Q1 Market Review: New S&P 500 Highs Evaporate in the Face of Trade Uncertainty
Significant uncertainties continue to shape market dynamics, with the potential impact of US tariffs on economic growth and inflation among the key risks.
While heightened uncertainty led to a significant pullback in many parts of the equity markets, Q1 saw a flight to quality in fixed income.
Normally our market reviews focus on activity in the quarter, however, as stock market declines continued into Q2 following President Trump’s April 2 tariffs announcement, we’re including notes about them in this update as they are having a significant impact.
Gain insights into this evolving economic landscape, its potential impact on investment strategies, and opportunities that may arise from the volatility with the following analysis:
- US Equities
- International Markets
- Fixed Income Assets
- Economic Conditions
- Inflation and GDP Projections
- Federal Reserve Policy
- Outlook
- Portfolio Implications
- Private Investments
- Tariffs
Key Takeaways on the Economy and Markets
Notable takeaways are as follows:
- Risks. Economic, geopolitical, and market uncertainties remain elevated.
- Tariffs. Tariff negotiations are evolving.
- Stock Markets. Equity valuations have undergone a healthy re-pricing.
- Economic Indicators. High-yield credit and US Treasury rates don’t yet indicate economic stress.
- Federal Reserve. The Federal Reserve is prepared to adjust interest rates if needed.
US Equities
The US stock market began 2025 with strong momentum, driven by economic growth, pro-business policy expectations and advancements in artificial intelligence. Market breadth im-proved as the labor market held strong and inflation retreated to acceptable levels. The S&P 500 hit a new high in mid-February however, a rapidly evolving, and at times chaotic stance on tariffs heightened trade policy uncertainty later in the quarter, severely impacting consumer and business confidence.
Despite robust corporate earnings, the S&P 500 experienced a correction exceeding 10% from the high, marking its worst quarterly performance (–4.3%) since the peak of the Fed interest rate hiking cycle in Q3 2022.
International Markets
International equities showed some resilience, supported by fiscal and monetary stimulus measures alongside a weakening US dollar. Europe notably shifted its economic priorities, with Germany implementing major defense spending increases and structural reforms aimed at bolstering both military and economic strength.
Fixed Income Assets
Fixed income assets acted as effective portfolio diversifiers during the quarter. High-quality bonds rallied as Treasury yields declined, with credit spreads widening modestly. The aggregate bond index posted a strong performance, gaining 3% by quarter-end.
Economic Conditions
US economic data remained solid during the quarter with noticeable resilience in the labor market. While consumer spending held steady, confidence surveys hinted at potential declines in future activity.
Corporate M&A activity fell short of expectations due to persistent uncertainty dampening business sentiment.
Inflation and GDP Projections
Coming into the year, consensus projections for real GDP growth for 2025 ranged 2–2.5%, however after the April 2 tariff announcement, estimates were revised downward. Growth forecasts now hover closer to .5%, with the probability of recession increasing.
Post the release of tariffs, expectations for inflation have increased. Tariffs as they stand are expected to create substantial headwinds for the economy.
What We’re Watching
In terms of US inflation, we expect CPI to initially run hotter in 2025 due to onetime tariff bumps but could be offset with productivity increases. Productivity holds the key to the US being able to navigate the current macroeconomic environment without a bout of stagflation, which is characterized by slowing economic growth, high unemployment, and rising prices simultaneously.
How the tariffs are passed through is another issue. Some of these one-time bumps may be absorbed by companies hitting their bottom line (lower margins) while other companies may try to pass through increases to consumers. Either way tariffs are likely to increase inflation in the short term. The hit to growth will depend on the ultimate magnitude and duration of the tariffs.
Federal Reserve Policy
The Federal Reserve paused its rate cutting cycle with Chair Powell affirming the Fed is in no hurry to cut rates at the most recent March FOMC meeting. The Fed’s quarterly Summary of Economic Projections showed expectations for lower growth and higher inflation for 2025. The Fed noted the economy is in good shape but also placed strong emphasis on the increasing un-certainty surrounding the economy and its future projections.
Federal Reserve Chair Jerome Powell has acknowledged lowered growth expectations amid tariff uncertainty but is also in tune to the potential for inflationary pressures. The Fed remains prepared to adjust rates depending on evolving economic conditions.
Outlook
Market sentiment regarding tariffs remains uncertain, potentially delaying capital expenditure decisions. Although consumer spending hasn’t been significantly affected yet, confidence surveys are declining.
We expect economic growth to slow over the next several quarters.
Portfolio Implications
Diversification remains a cornerstone of resilient portfolio construction. Core bonds played a stabilizing role in Q1, with the US Aggregate Bond Index posting a quarter-to-date gain of approximately 3%.
Additional sources of diversification, such as exposure to international and emerging markets equities, have also contributed positively to performance.
Allocations to real assets—including real estate, utilities, and infrastructure—have provided additional support.
Private Investments
Private investments continue to be a valuable component in managing volatility and enhancing long-term portfolio resilience. Allocations to private investments not only offer the potential for enhanced returns but can also improve diversification and help reduce overall portfolio risk.
Tariffs
The tariff plan President Trump introduced on Liberation Day was more hard-hitting than the markets anticipated. It included a 10% universal tariff on US imports with the goal of raising revenue as well as higher tariff rates on 25+ of the country’s biggest trading partners based on their trade deficit with the US.
Following this announcement the stock market sold off aggressively. However, on April 9 stocks rallied back after President Trump abruptly announced he would back down on his reciprocal tariffs for 90 days. The S&P 500 rose 9.5 percent following the announcement—its sharpest single-day gain since October 2008.
Overall, US average tariff rates could be as high as 25%-30% if they go into effect as is. This is well above expectations. We believe these will be negotiated lower but if they aren’t, inflation will likely rise and growth will be dented more than originally anticipated, with a mild US recession risk possible in coming quarters.
What We’re Watching
What happens next is dependent on many variables. While the 10% universal tariffs will likely be permanent, the country specific tariffs could be negotiated down.
The fiscal and monetary response around the world will matter. US tax cuts are likely to be accelerated and fiscal stimulus around the world is likely in play—and already happening in Germany, Europe, and China.
The Fed is likely to look through inflationary pressures and respond to any growth hit by lowering rates.
As these developments unfold, portfolio diversification remains crucial. The Moss Adams Portfolio Management Team will continue to monitor the evolving macro environment.
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For more information about the economic landscape and what it means for investors, contact your Moss Adams professional.