Quarterly Market Review — 1Q25

Global equities (-2.0%) fell in the first quarter. Financial markets were rattled by seismic shifts in US foreign policy, which significantly altered the outlook for global trade, economic growth, and inflation. Enthusiasm for AI-related expansion and a more accommodative US business environment waned in response to rising economic and tariff uncertainty. Consequently, capital rotated away from the US to international markets, particularly Europe, which considerably outperformed amid signs of a more favorable economic backdrop, including less-restrictive monetary policy, improving leading indicators like manufacturing output, and greater fiscal stimulus. In Germany, the center-right Christian Democratic Union and the Christian Social Union won the federal election, sparking optimism for economic revitalization. The new coalition government unveiled monumental spending plans to boost economic growth and defense, with total spending likely to exceed €1 trillion.

In March, US Treasury Secretary Scott Bessent outlined an ambitious vision to reduce the US deficit to 3% – 3.5% of GDP by 2028 while avoiding a recession. US GDP grew by 2.8% in 2024, and the federal deficit was 6.4% of GDP. The plan aims to shift more growth back into the private sector through a combination of deregulation and affordable energy. Additionally, the US announced plans for a multi-hundred-billion-dollar investment in the AI project “Stargate,” with the aim to invest heavily in AI infrastructure. China’s economy expanded by 5% in 2024, meeting the government’s official target. Its State Council announced a special action plan to bolster consumption and the economy, including tax incentives and subsidies for key industries.

Global fixed income markets generated positive total returns during the first quarter, as measured by the Bloomberg Global Aggregate Index hedged to US dollars. Commodities (+4.9%) ended higher, with precious metals, industrial metals, energy, and agriculture & livestock contributing positively to returns.

Equities

United States

US equities (-4.3%) registered their first quarterly loss since the third quarter of 2023. Volatility surged and risk sentiment waned as markets grappled with the implications and considerable uncertainty surrounding the new administration’s policies on trade, immigration, fiscal spending, tax cuts, and deregulation. Escalating tariffs and the prospect of additional levies in April worsened the outlook for inflation and economic growth, fueling fears of stagflation and recession. Against a turbulent market backdrop, technology indices fell sharply, and growth and small-cap stocks substantially underperformed their value and large-cap counterparts, respectively. Deteriorating business and consumer sentiment threatened to curtail spending, although economic activity indicators released in March suggested that the US economy remained on a solid footing. The US Federal Reserve (Fed) left interest rates unchanged as officials continued to monitor how aggressive trade policies impact inflation, spending, and investment. The Fed cut its 2025 economic growth forecast to 1.7%, from 2.1%, and hiked its annual core inflation estimate to 2.8%, from 2.5%, signaling a greater risk of stagflation. According to FactSet, first-quarter earnings for companies in the S&P 500 Index are forecast to grow 7.3% year over year, below the 10-year average earnings growth rate of 8.5% and appreciably lower than 18.3% in the fourth quarter.

Economic data released during the quarter was mixed but indicated that the economy remained resilient. The labor market was solid overall; in February, nonfarm payrolls grew by a healthy 151,000; the unemployment rate was 4.1%; and initial jobless claims ended the quarter at a historically low level. Consumer spending declined in January but rebounded in February, while personal income growth of 0.8% significantly outpaced consensus expectations. A sharp decline in consumer sentiment over the quarter threatened to constrain spending and economic growth in the months ahead, as anxiety about inflation and a slowing economy sent the Conference Board’s Consumer Confidence Index down to its lowest level in four years. Data for pending, new-, and existing-home sales in February rebounded amid better weather and a larger inventory of houses for sale, although still-high interest rates and considerable economic uncertainty are anticipated to weigh on housing demand. Small-business sentiment receded to a four-month low in February amid concerns about tariffs and a lack of clarity on taxes and regulations, which constrained spending and investment plans. The manufacturing sector slipped back into recessionary territory in March, with prices surging to a three-year high. The Institute of Supply Management Services Index remained in expansionary territory during the quarter, registering 53.5 in February.

Within the S&P 500 Index (-4.3%), four of the 11 sectors posted negative results for the quarter. Consumer discretionary (-13.8%) was the worst-performing sector, led lower by automobiles (-33.4%). Information technology (-12.7%) and communication services (-6.2%) also underperformed. Energy (+10.2%) was the best-performing sector. Health care (+6.5%) and consumer staples (+5.2%) also outperformed.

Europe

European equities (+6.4%) advanced in the first quarter. Rapidly accelerating trade frictions severely strained Europe/US relations and threatened the outlook for Europe’s economy. European leaders warned of swift countermeasures to the 25% tariffs that US President Donald Trump levied on European cars and goods, while European Central Bank (ECB) President Christine Lagarde indicated that the tariffs could reduce eurozone GDP by 0.5% and raise inflation by a similar margin in the first year if the European Union retaliates in kind. The eurozone economy expanded 0.9% in 2024 but unexpectedly stagnated in the fourth quarter, dragged down by two straight years of economic contraction in Germany along with political turbulence in the country. The region’s business activity grew modestly throughout the first quarter and returned to expansionary territory for the first time since August 2024, as the HCOB Flash Eurozone Composite PMI increased to 50.4 in March, from 49.6 in December. Notably, Germany recorded its fastest growth in 10 months, offsetting a sustained decline in French business activity. Against a backdrop of lackluster economic growth and an increasingly uncertain economic outlook, the ECB delivered two interest-rate cuts but signaled a slower pace of policy easing due to the inflationary risks posed by a trade war, along with higher defense and infrastructure spending. Nevertheless, a second straight monthly decline in annual eurozone headline inflation, to 2.2% in March, strengthened the case for another rate cut in April. Core inflation dropped to 2.4%. In March, the US purportedly reached agreements with Ukraine and Russia for a ceasefire in the Black Sea, though no timeline was set. Fourth-quarter earnings for companies in the STOXX 600 Index are projected to increase 8.0% from a year earlier, according to LSEG.

Europe’s manufacturing downturn continued to ease in March; the HCOB Eurozone Manufacturing PMI rose for the third consecutive month, to 48.6, as factory output increased for the first time in two years. Concerningly, input cost inflation accelerated to a seven-month high, and output prices lifted for the first time in seven months. Business confidence dipped to a three-month low. The HCOB Flash Eurozone Composite PMI revealed that services-sector activity in March grew for the fourth straight month, but only modestly. Input costs and output prices continued to rise but at a slower pace.

Germany’s (+10.8%) landmark €1 trillion fiscal spending plan won final approval from the upper house of parliament, as the chancellor-in-waiting, Friedrich Merz, secured an agreement with the Social Democrats. The massive package is set to unlock an unprecedented amount of spending on defense, infrastructure, and climate initiatives, lifting Germany’s ZEW Indicator of Economic Sentiment to its highest level since February 2022. In France (+5.8%), Prime Minister François Bayrou survived a no-confidence vote in the National Assembly, and Parliament approved a 2025 budget aimed at taming the country’s deficits. The UK’s (+6.4%) Office for Budget Responsibility sharply downgraded its 2025 GDP growth forecast from 2% to 1%, prompting Chancellor Rachel Reeves to unveil a £14 billion plan of spending cuts to fix the country’s strained public finances amid rising borrowing costs. Encouragingly, the S&P Global Flash UK PMI Composite Output Index showed that business activity climbed to a six-month high in March, as solid growth in services helped to offset the sharpest decline in manufacturing production since October 2023.

Pacific Basin

Pacific Basin equities (-3.0%) ended the quarter lower. In Australia (-3.2%), equities were weighed down by global trade uncertainty, with Treasurer Jim Chalmers warning of a “seismic” impact on the global economy from the US administration’s trade policies. The government unveiled roughly AU$17.1 billion (US$10.7 billion) of tax cuts in a new preelection budget that aims to ease cost-of-living concerns and win back disgruntled voters ahead of federal elections in May. In February, the Reserve Bank of Australia (RBA) cut interest rates for the first time in four years, to 4.1%, as the headline CPI cooled more than expected to 2.4% year over year. The prospect of additional rate cuts was bolstered by tepid consumer spending and sentiment, a sharp drop in employment during February, and slowing wage growth in the fourth quarter. However, a prolonged trend of surprisingly strong job growth, low unemployment, and inflation uncertainty supports the view that policy easing will be gradual.

In Japan (-4.4%), the Bank of Japan (BOJ) kept its benchmark interest rate unchanged in March after raising its key policy rate to 0.5% in January, citing concerns about the potential impacts of US trade policies on the economy. BOJ Governor Kazuo Ueda indicated that wages and prices were on an upward track and reiterated that the central bank will continue to raise interest rates if its economic outlook is realized, but he refrained from providing any hints on the timing until there is more clarity on US tariffs. Nominal wages in February grew at the fastest pace in nearly three decades, and inflation in Tokyo increased more than expected in March, with core consumer prices (excluding fresh food) expanding 2.4% versus a 2.2% forecast. Although strong wage growth and rising inflation suggested that the economy was durable enough to support further rate hikes, slower-than-expected annualized GDP growth of 2.2% in the fourth quarter highlighted areas of weakness in the economy, particularly consumer spending. This gave the BOJ more scope to pursue a gradual approach to tighter policy. Expectations of higher Japanese interest rates drove Japan’s 40-year government bond yield to its highest level since its debut in 2007.

Singapore’s (+8.3%) retail sales rose 4.5% in January, driven by strong Chinese New Year spending. Slowing economic growth and softening inflation supported the Monetary Authority of Singapore’s (MAS’s) decision to loosen policy settings for the first time in nearly five years. Core inflation cooled to a below forecast reading of 0.6% year over year in February — the smallest rise in prices for more than three years — after it had dipped to 0.8% in January. MAS lowered its 2025 core inflation forecast from an average of 1.5% – 2.5%, to 1% – 2%, and projected that GDP growth will moderate to 1.0% – 3.0% in 2025, down from 4.4% in 2024, but in line with consensus expectations of 2.6%. New Zealand’s (-9.8%) economy exited recession, with better-than-forecast GDP growth of 0.7% in the fourth quarter, driven by tourism. However, soft domestic demand pressured the central bank to ease policy further despite upside inflation risks. Hong Kong’s (+4.6%) economy grew at a moderate 2.5% pace in 2024, with flat consumption and a lackluster property sector weighing on economic activity.

Emerging Markets

Emerging markets (EM) equities (+2.7%) rose, with Latin America leading the gains, followed by Europe, the Middle East, and Africa (EMEA), and Asia.

Latin America (+7.5%) surged higher. Brazil (+6.9%) reported robust 3.4% economic growth in 2024, but momentum slowed more than expected in the fourth quarter amid tighter monetary policy. The government maintained its growth forecast of 2.3% for 2025 but significantly lifted its inflation forecast, to 4.9%. The central bank raised interest rates by 100 bps, to 14.25%, to curb accelerating inflation, signaling a smaller-sized hike in May. In Mexico (+6.9%), the central bank slashed its 2025 GDP growth estimate to 0.6%, from 1.2%, amid US trade policy uncertainty and an unexpected contraction in fourth-quarter GDP. The Bank of Mexico reduced interest rates to 9.0% as headline inflation steadily eased, falling to 3.67% annually in March. Chile’s (+13.4%) central bank modestly raised its 2025 GDP growth estimate to 1.75% – 2.75% after growth of 2.6% in 2024 exceeded estimates.

In EMEA (+6.9%), OPEC+ issued a new schedule for further oil output cuts, which will more than offset the monthly production hikes the group plans to introduce in April. Saudi Arabia’s (+1.5%) non-oil exports, including re-exports, increased at a stout 10.7% pace in January compared to a year earlier, while oil exports declined 0.4%. South Africa’s (+11.0%) central bank paused its rate-cutting cycle as inflation remained steady at 3.2% year over year in February. The government’s initial 2025 budget included an investment of over 1 trillion rand (US$54 billion) on infrastructure over the next three years to drive economic growth. Poland’s (+23.2%) government announced investment plans of more than 650 billion zlotys (US$160 billion) in 2025, which includes tax cuts, deregulation, and investments in sectors such as defense, green energy, information technology, and transport infrastructure.

In Asia (+1.7%), China (+15.0%) surged after the release of DeepSeek’s AI model boosted investor sentiment, particularly for Chinese technology companies. The government imposed tariffs of 10% – 15% on farm products, US crude oil, liquefied natural gas, and select other products after the US levied an additional 10% tariff on all Chinese goods. The authorities announced plans to inject at least 400 billion yuan (US$55 billion) into the country’s biggest banks as part of a broader stimulus package to spur economic growth. Data released in March showed modest economic growth at the beginning of the year as consumption, investment, and industrial production exceeded estimates. However, a protracted property downturn, still-tepid household demand, and weaker-than-expected exports and inflation underscored the need for more policy support. Taiwan’s (-11.4%) central bank lowered its 2025 GDP forecast to 3.05%, as potential US tariffs and deep budget cuts threatened economic growth. India’s (-3.1%) government announced tax cuts worth 1 trillion rupees (US$11.4 billion), and the central bank lowered its key interest rate for the first time in five years to spur economic growth and spending.

Fixed Income

Global fixed income markets generated positive total returns during the first quarter, as measured by the Bloomberg Global Aggregate Index hedged to US dollars. Trade tensions and monetary policy divergence drove market volatility and an increasingly clouded economic outlook. Most fixed income sectors underperformed government bonds as spreads widened. The US dollar depreciated versus most currencies due to the US administration’s efforts to reduce the trade deficit.

Global economic data once again diverged during the quarter. Inflation generally eased for major economies despite elevated trade tensions. Consumer spending continued to buoy the US economy, as GDP expanded by a healthy 2.4% during the fourth quarter, although business and consumer sentiment indicators deteriorated. Eurozone economic growth surprised to the upside, while core inflation moderated to 2.4% year over year. Services activity lifted in the UK, while manufacturing remained in contractionary territory. Trends remained largely intact in Japan, with steady economic growth and rising confidence that inflation is firmly embedded in the economy.

Developed market sovereign yields ended mixed over the first quarter. Elevated uncertainty from volatile US trade policy dampened economic growth expectations, with rising recession risks and stagflation concerns driving US Treasury yields lower. Canadian bond yields also dropped as markets anticipated more rate cuts from the Bank of Canada in response to tariff threats. European yields rose after the German parliament passed a transformational fiscal package containing a €500 billion infrastructure fund and changes to the debt brake to allow for higher defense spending and more fiscal spending for state governments. The UK gilt yield curve steepened as long-dated yields rose due to reaccelerating inflation, while short-dated yields declined as markets anticipated more rate cuts by the Bank of England. Japanese bond yields reached their highest levels since 2008 on expectations of further rate hikes by the BOJ.

Currencies

The US dollar depreciated sharply against global currencies over the quarter, reversing US election-fueled gains from the end of last year. Within the G10, high-beta, pro-risk currencies like the Swedish krona and Norwegian krone notably outperformed the US dollar. The Japanese yen also strengthened, benefiting from the repricing of US policy rate expectations. EM currencies broadly gained. Brazil’s central bank hiked its policy rate to fight inflation and stabilize the real. The Polish zloty outperformed, fueled by market optimism for an end to the Russia/Ukraine conflict, Germany’s fiscal spending plan, and the central bank’s hawkish stance. Conversely, the Turkish lira depreciated against the US dollar amid political turmoil.

Commodities

Commodities (+4.9%) ended the first quarter higher, with precious metals, industrial metals, energy, and agriculture & livestock all contributing positively to returns.

Energy (+4.8%) sharply advanced during the period. Natural gas (+28.4%) surged, driven by increased drawdowns from higher US demand due to colder weather and elevated liquefied natural gas exports from the US. Additionally, the US Energy Information Administration reported that natural gas inventories were tracking below their five-year average. Heating oil (+3.2%), crude oil (+2.3%), gasoline (+1.6%), and gas oil (+0.5%) increased amid tightening global supplies and President Trump’s announcement of tariffs on imports from countries that purchase oil and gas from Venezuela. Oil prices were also supported by supply worries after Trump warned of further sanctions on Russian oil and threatened military action against Iran.

Industrial metals (+5.2%) rose. Copper (+10.9%) rallied as US buyers stockpiled the metal due to tariff speculation, while global demand for copper remained robust for its widespread use in energy and technology sectors, including electric vehicles. Additionally, copper was bolstered by the Shanghai Futures Exchange’s report of a significant inventory decline, increased Chinese imports, and a smelter suspension in Chile. Lead (+3.6%) climbed on US tariffs and reduced production in China, which outweighed signs of a Chinese inventory buildup. Nickel (+3.3%) rose amid heavy rain in the Philippine mining region of Caraga, which disrupted mining operations and led to a surge in freight costs. Conversely, lower demand amid US trade policy uncertainty weighed on aluminum (-1.5%) and zinc (-5.2%) prices.

Precious metals (+18.2%) rallied. Silver (+18.5%) surged on tight supplies and robust industrial demand from alternative energy sources that produce electricity. Increasing global trade tensions driven by US tariffs also supported silver and gold (+18.2%) prices as investors shifted to perceived safe-haven assets.

Agriculture & livestock (+1.3%) advanced. Coffee (+22.1%) surged to a record high as drought and elevated prices nearly depleted Brazil’s coffee stockpile, and global coffee supplies remained limited. Additionally, US tariffs threatened to drive coffee prices even higher at a time when coffee demand remains strong. Sugar (+7.7%) was bolstered by tightening global supplies. India, the world’s second-largest sugar producer, reduced exports because of low production caused by adverse weather, while a stronger Brazilian real curbed exports from Brazil. Feeder cattle (+7.6%) also ended higher due to tightening supplies. Potential US tariffs led Canadian ranchers to reduce their cattle herds, while demand for cattle remained robust. Cotton (-3.3%) ended lower due to increased production and lower exports. Uncertainty about US tariffs on Mexico weighed on the grain and livestock markets, as Mexico is a top importer of lean hogs (-5.0%). Cocoa (-35.5%) slid as recent rains in West Africa eased the dry conditions and enhanced the production outlook. Additionally, demand for cocoa slowed as chocolate makers responded to higher prices by replacing cocoa with other ingredients, while stronger exports from Nigeria also pressured prices.