Quarterly Market Review: Q1 2025
Investing PlanningCogentBlue's evidence-driven investing portfolios are strategically invested with a focus on long-term performance objectives. Portfolio allocations and investments are not adjusted in response to market news or economic events; however, we evaluate and report on market and economic conditions to provide our investors with perspective and to put portfolio performance in proper context.
Main Takeaway
The U.S. economy continued on an impressive streak in 2024 with third quarter real GDP growth of 3.1% annualized. Growth outside the U.S. remains weak with third-quarter GDP growth in the eurozone and Japan coming in at 0.4% and 1.2% respectively. U.S. unemployment remains low, and job growth remains positive, although the pace of hiring has slowed this year. Inflation remains sticky in the U.S. as well as globally with the latest U.S. CPI reading at 2.7%, still above the Fed’s 2% target.
Top Risks
Aggressive tariff policies could increase price pressures while also having the potential to lead to a larger scale trade war, which could have significant negative impacts on global economic growth. In recent months, unemployment has been rising and cyclical areas of the economy (such as manufacturing and residential construction) have been softening. The U.S. federal debt continues to be a long-term concern with the potential to force interest rates higher for much longer, especially at the long end of the yield curve.
Sources of Stability
The U.S. economy remains strong and is unlikely to experience a major slowdown in 2025. U.S. household balance sheets remain strong, which has spurred robust consumer spending. The U.S. also continues to benefit from a surge in corporate and research spending on the back of artificial intelligence (AI). This “AI boom” has spurred massive investment into the development of AI itself as well as the infrastructure supporting it, including semiconductors, data centers, and energy infrastructure.
Key Areas to Watch
U.S. Economic Growth. The U.S. economy grew at an annualized rate of 2.4%1 in Q4, but early signs of slowing have emerged this year. As of April 3, the Atlanta Fed projected a 2.8% contraction2 in real GDP for Q1. This reversal is largely driven by an 11.9% surge in U.S. imports3—the second-largest monthly increase since 1992—coupled with weaker-than-expected ISM manufacturing data.
Monetary Policy. The Fed has held the federal funds target rate steady at 4.25%–4.50% following both its January and March meetings. At the March meeting, Chair Powell emphasized elevated uncertainty around the future path of interest rates, largely stemming from the new administration’s evolving trade, immigration, and fiscal policies.
Inflation Trajectory. Inflation remains above the Fed's 2% target, but recent data offers some encouraging signs. In February, the Consumer Price Index (CPI) rose just 0.2%4, bringing the annual inflation rate down to 2.8% from 2.9% in December. Shelter costs, the biggest driver of inflation, climbed 4.2%, their slowest pace since December 2021. However, the inflation outlook remains highly uncertain, as future tariff policies add another layer of unpredictability.
Fiscal Policy. Projections from the Congressional Budget Office’s (CBO) latest Budget and Economic Outlook underscore the urgency posed by rising national debt. Over the next decade, federal spending is expected to average 24% of GDP, while revenues will lag at just 18% of GDP. These projections assume the scheduled expiration of key provisions in the Tax Cuts and Jobs Act (TCJA) at the end of 2025. If those tax cuts are extended without offsetting measures, deficits could widen further.5 However, the Trump administration aims to reduce the deficit to 3% of GDP by 2028.6
Labor Market. The latest labor market data would suggest a stable job market, with 151,000 jobs added in February and unemployment edging up to 4.1%.7 January’s JOLTS report showed job openings rising to 7.7 million8, maintaining a 1.1-to-1 ratio of openings to workers, while hires and layoffs remained steady. However, a report from Challenger, Gray & Christmas revealed planned job cuts surged 245%9 to 172,017 in February, the highest since July 2020.
Global Economy. Global economic growth remained sluggish in the fourth quarter with the euro area and U.K. posting negligible GDP gains of 0.0%10 and 0.1%11, respectively, while Japan fared only slightly better, expanding 0.6%10. Consensus estimates for a global recession in 2025 have inched higher in Q1 but remain relatively low, holding at 35% or less for the U.S., U.K., and Europe.
Consumer Spending. Consumer spending slowed from its Q4 pace, signaling headwinds for the economy. The Conference Board’s Consumer Confidence Index dropped by 7.2 points to 92.94, the fourth straight monthly decline. The Expectations Index, which gauges consumers’ short-term outlook on income, business, and labor market conditions, plummeted to 65.2—well below the critical recession-signaling threshold of 80.
Yield Curve. The fixed income markets reversed their Q4 trend as Treasury yields declined across the curve in Q1. Yields on the 2-year, 5-year, 10-year, and 30-year Treasuries fell by 0.36%, 0.42%, 0.35%, and 0.19%, respectively. The Treasury curve steepened ever so slightly, with the 2-year/10-year spread widening by 0.01% to 0.34%. Rates moved lower amid mounting concerns over an economic slowdown fueled by escalating trade tensions.
Economic Spotlight: U.S. Tariffs—A Shock to the System?
Policy changes often have a domino effect on the economy. For example, if the government lays off workers, unemployment can rise, leading to lower consumer spending and slower economic growth. Similarly, tariffs may drive up prices consumers pay for imported goods, increasing demand for domestic products and potentially contributing to inflation. The overall impact depends on the
significance and duration of these changes.
Apollo Global Management used a model similar to the Federal Reserve's model of the U.S. economy to assess the potential effects of tariffs and DOGE policies on GDP and inflation. Their projections show GDP could drop about 0.5% over the coming quarters, while inflation could rise slightly by 0.2%.
In other words, these factors are expected to cause a small and temporary economic slowdown—pushing prices up a little and slowing growth. However, the impact is not expected to be strong enough to cause a recession.
Economic and Market Snapshot
Global equity markets were a mixed bag in the fourth quarter with U.S. markets producing modest returns while international stocks were down sharply. Small value lagged over the quarter both domestically and internationally, with U.S. small value stocks underperforming the broad U.S. market by 3.69% and international small value trailing broad international markets by 0.69%.
Fixed income returns in the U.S. were negative in the fourth quarter as rates rose sharply over the quarter. The increase in rates was driven by expectations that the Fed would have to slow the pace of rate cuts in 2025 to combat sticky inflation.
Where do markets go from here?
The not-so-magnificent 7. The once-shining stars of the market, known as the “Magnificent 7,” have dimmed in 2025, with every member under water through the first quarter. At the end of Q1,the group averaged a disappointing -15.7% year-to-date return, lagging a significant 11.0% behind the broader Russell 3000 index.
International is back. After years of underperformance, international markets are making a strong comeback in 2025. Through March 31, international developed stocks, as measured by the MSCI World ex-USA IMI Index, have posted impressive gains of 5.8%, outpacing the Russell 3000 Index by a robust 10.5% margin. With more modest valuations across international markets, we believe this rally could have the legs to sustain itself over the long term.
Interest rate uncertainty persists. The outlook for interest rates remains uncertain following the latest Federal Open Market Committee (FOMC) meeting. While the updated Fed dot plot continues to project two additional rate cuts in 2025, Chair Powell emphasized during his press conference that major policy shifts under the new administration will take time to fully materialize. As a result, the Fed is positioned to remain patient and wait for greater clarity before making further moves.
What are the investment planning implications?
Stay the course. The sharp sell-off in early April triggered by worse-than-anticipated tariff announcements reminds us that volatility is not only common, but often sudden. Investors who react to headlines risk missing the longer-term recovery that historically follows such pullbacks.
Expect volatility. Uncertain tariff policies have fueled a large increase in stock market volatility. Over the past 45 years, the S&P 500 has experienced an average intra-year decline of -14%. Yet, despite these dips, the index still posted positive annual returns in 34 of those years. In our view, the biggest risk to long-term financial plans is overreacting to short-term volatility.
Explore all of your options. Incorporating new and unique sources of risk and return, such as alternative investments, can be an effective way to diversify exposure to traditional stock and bond market risks. Alternative investments, including private credit, reinsurance, and market neutral strategies, often exhibit lower correlations with public markets, providing portfolio stability during periods of equity and fixed income volatility, though they may not be suitable for all investors.
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1 U.S. Bureau of Labor Statistics. “Gross Domestic Product, 4th Quarter and Year 2024 (Third Estimate), GDP by Industry, and Corporate Profits” March 27, 2025
2 Atlanta Fed GDPNow estimate as of March 26, 2025
3 Focus Partners Wealth. “Monthly Investment Commentary: March 2025” March 6, 2025
4 U.S. Bureau of Labor Statistics. 12-month percentage change, Consumer Price Index, selected categories. February 2025
5 Bipartisan Policy Center. “Visualizing CBO’s Budget and Economic Outlook: 2025” February 4, 2025
6 Americanprogress.org. "Scott Bessent’s 3 Percent Deficit Target Would Require Massive Cuts to Anti-Poverty Programs and Middle-Class Tax Increases," Jan. 15, 2025
7 U.S. Bureau of Labor Statistics. “Employment Situation Summary” March 7, 2025
8 CNBC. “Job openings see gains in January in a sign of labor market stability” March 11, 2025
9 Reuters. “US announced job cuts surge 245% in February on federal government layoffs” March 6, 2025
10 The Conference Board. “US Consumer Confidence tumbled again in March” March 25, 2025
11 Trading Economics
Headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.
Major Asset Class Returns: The index representation for the Major Asset Class Returns is as follows: U.S. stocks are represented by the Russell 3000 Index, international stocks by the MSCI World ex U.S. IMI Index, emerging markets by the MSCI Emerging Markets IMI Index, U.S. government bonds by the Bloomberg Government Intermediate Total Return Index, and global bonds by the FTSE World Government Bond 1-5 Year Index. Past performance is not a guarantee of future results. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Information from sources deemed to be reliable, but its accuracy cannot be guaranteed.
Key Economic Indicators: Sources: Bureau of Economic Analysis (BEA) for real GDP growth. Real GDP is the annual rate of change of real gross domestic product, seasonally adjusted. Bureau of Labor Statistics (BLS) for core CPI. The core consumer price index (CPI) is the annual rate of change, seasonally adjusted, and excludes food and energy. Consumer sentiment is from the University of Michigan’s consumer sentiment index. Unemployment rate is reported by the BLS, and jobs added is based on nonfarm payroll employment reported by the BLS. Retrieved from FRED, Federal Reserve Bank of St. Louis. For all indicators, the boxed number reflects the latest reading, and the line above the box shows the change since the last update.