The first quarter of 2025 took equity investors on a wild roller coaster ride. U.S. equity markets started the year on a strong note, adding +4.6% to a rally that started after the election and continued through the middle of February, when the S&P 500 Index reached yet another all-time high. However, in the second half of the quarter enthusiasm eventually gave way to renewed concerns around trade, national debt, tariffs, and the suggestions from the White House that short term economic pain might be a worthwhile tradeoff for long-term strategic gains. As a result, the S&P 500 declined -8.5% from its high and ended the quarter with a -4.28% loss. The Dow Jones Industrial Average Index lost -0.87%, and the tech-heavy Nasdaq 100 Index officially entered the correction territory with -10.25% decline. The Russell 2000 Index of small-capitalization companies barely escaped the same fate with a -9.48% loss, and the S&P 400 Mid-Cap Index shed -3.4% during the first quarter of 2025.
Much of the sell-off was driven by the same stocks that led to big gains in the previous two years – the Magnificent Seven of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. While collectively returning +172% in 2023-2024, those stocks declined -15% on average year-to-date through the end of the quarter, and, composing almost one-third of the S&P 500 market capitalization, dragged the index down. The other 493 stocks in the index were up +0.4%, which explains the relatively stable performance of the S&P 500 Equally Weighted Index, which lost -0.67% compared to its capitalization-weighted counterpart. Seven of the eleven sectors of our domestic economy posted positive returns for the quarter, led by energy and the defensive health care, consumer staples, and utility sectors. This change of leadership also manifested itself in the best quarter for value stocks versus their growth peers since 2022.
International stocks have outperformed U.S. equities by almost 10% with the MSCI EAFE Index of developed markets ending the quarter with a +7.03% gain as the result of increased spending on defense and infrastructure in Europe.
Bonds also posted a positive return of +2.78% through March 31, 2025, with the yield on the 10-year U.S. Treasury note falling from 4.57% on the last trading session of 2024 to 4.23% on March 31, 2025.
Given the elevated uncertainty, it was not surprising that the Federal Reserve decided to take no action on interest rates over the quarter. Federal Reserve Chair Jerome Powell did, however, leave the door open for future rate cuts at the bank’s Open Market Committee meeting in March, suggesting that the Fed was more concerned about the downside risks to growth than the upside inflation risks, despite inflation rates stubbornly remaining above the Fed’s target of 2%.
Real gross domestic product (GDP) increased at an annual rate of 2.4% in the fourth quarter of 2024, according to the third estimate released by the U.S. Bureau of Economic Analysis on March 27, 2025. The latest employment report published by the Bureau of Labor Statistics showed that total nonfarm payroll rose by +228,000 in March, higher than the average of +158,000 during the previous 12 months, asserting the strength of our domestic job market despite the decline in the number of employed federal workers. Conversely, some U.S. economic data was cooling throughout the first quarter of 2025, especially the housing inventories, which had risen to pre-Covid level, raising concerns about a possible slowdown in residential construction later this year. As for the GDP estimates for 2025, while the Atlanta Fed GDPNow economic model suggests a significant -2.8% contraction in the first quarter, consensus currently projects 2025 real GDP growth of +2.0%.
When it comes to the recent market plunge, stocks tend to experience a 10% or greater downturn roughly every two years. The last correction occurred in 2022, when the S&P 500 Index dropped -27.5% from its January peak to the October trough. Therefore, historically, the pullback we have been experiencing recently is a part of a natural market cycle. Obviously, being expected does not make a correction less painful. It is worth mentioning that similar sharp corrections have resulted in an average positive return of 18% over the following twelve months. Furthermore, the risks associated with recession or bear market fear caused by the tariffs is already priced in the stock market. In just the month of March, the percentage of investors who expect stock prices to decline rose to extreme levels. Historically, such elevated levels of pessimism tend to precede market rebounds, and not declines, and may be a contrarian positive look for the markets going forward.
Dumont & Blake Investment Advisors, LLC
March 31, 2025