Domestic Equities
U.S. equity markets posted steep declines in the first quarter of 2025, rattled by escalating trade tensions, fading enthusiasm for AI-driven growth, and signs of softening economic momentum. The S&P 500 fell 5.8%, the Nasdaq Composite dropped 7.3%, and the Dow Jones Industrial Average lost 4.2%, marking the worst quarterly performance since 2022.
Tariff-related headlines dominated the quarter. In February, the Trump administration imposed new tariffs on imports from Mexico, Canada, and China, followed by additional levies on autos, steel, and aluminum in March. As the quarter closed, attention turned to the next wave of measures expected on April 2—dubbed “Liberation Day” by the White House—which promises a broader and more aggressive tariff rollout, including a 37% duty on Chinese imports. The uncertainty surrounding the administration’s trade policy significantly weighed on investor sentiment and prompted companies to reassess investment and hiring plans. The University of Michigan’s consumer sentiment index for March plunged to 57.0, down sharply from 64.7 in February, reflecting growing anxiety about inflation, job cuts, and economic direction.
Sector performance reflected the underlying rotation. Information Technology and Consumer Discretionary stocks led the market lower, both posting steep losses as enthusiasm for AI leadership waned and economic concerns heightened. A notable headwind came from China’s DeepSeek, which unveiled an AI model with performance on par with market leaders but reportedly at a significantly lower cost. The development forced a market-wide reassessment of U.S. tech dominance and the profitability assumptions embedded in the “Magnificent Seven” mega-cap stocks. In contrast, Energy and Healthcare sectors posted gains during the quarter, benefitting from macro tailwinds and a shift toward more defensive positioning.
The Federal Reserve held rates steady throughout the quarter, but softening economic data and increased financial market stress prompted a notable shift in expectations. By the end of March, markets were pricing in a 40% probability of a rate cut at the May meeting. The 10-year Treasury yield fell below 4% for the first time since November, reflecting both a flight to safety and growing concerns about the economic outlook.
Economic indicators were mixed. Job growth remained positive but slowed from prior quarters, while inflation continued to run above target. The manufacturing sector remained in contraction territory, though services showed modest expansion. As the quarter ended, attention turned to the upcoming CPI and PPI reports in early April, along with earnings from major banks and asset managers, which could help gauge the durability of consumer and business confidence.
Looking ahead, unless tariff tensions ease or the Fed signals a clearer dovish pivot, market volatility is likely to remain elevated. The first quarter served as a wake-up call that geopolitics and policy shifts can quickly upend even the most well-anchored narratives.
Foreign Equities
Like the internal micro rotation within U.S equity markets Eurozone equity markets, investors rotated away from the U.S. exceptional consensus opinion and into the unloved foreign equity markets as the MSCI ACWI ex-USA index outperformed, returning 5.3% for the first quarter of 2025.
Eurozone
Although growth concerns and the negative effects of trade policy dominated the narrative heading into 2025, a rotation out of U.S. equities into the Eurozone was a key theme in the first quarter. Financials led the way, supported by strong bank earnings and relative insulation from tariff-related risks. In contrast, consumer discretionary and technology stocks, mirroring trends seen in the U.S., were the weakest performers. The MSCI EMU Index declined 4.3% for the quarter.
In Germany, February’s elections saw Friedrich Merz’s Christian Democrats (CDU) emerge as the largest party. Even before formally forming a government, Merz moved swiftly to implement a significant fiscal policy shift. Parliament approved plans to loosen Germany’s strict borrowing rules, carving out exemptions for defense and security spending, and authorizing the creation of a €500 billion infrastructure fund. Long associated with budgetary restraint and underinvestment, Germany is now poised to substantially increase public spending, potentially lifting the investment-to-GDP ratio by more than two percentage points annually, a major departure from its traditional economic model.
Meanwhile, the European Central Bank (ECB) cut interest rates again in March, bringing its key rate down to 2.5%, a full two percentage points lower than at the start of 2024 and the sixth cut in the last nine months. Despite the easing, the ECB struck a more hawkish tone in its guidance, stating, “Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up.” The statement suggests further cuts may be on the table, though it also hints at a potential pause later in 2025. Inflation moderated to 2.3% in February, down slightly from 2.5% in January, but overall growth remains subdued. Business confidence continues to be challenged by the evolving global trade environment.
UK
Like the Eurozone, UK equities managed to outperform the U.S. in the first quarter, thanks largely to strong showings from big-name companies. Large caps in financials, energy, and healthcare led the charge as global investors continued to rotate out of pricey U.S. tech stocks. On the other hand, small and mid-sized UK companies continued to struggle, weighed down by uncertainty around the country’s economic outlook. The MSCI UK Index rose 6.4%.
On the policy front, the Bank of England (BoE) held rates steady after a 25bps cut in February. While inflation has cooled slightly, easing to 2.8% in February from 3.0% in January, it remains elevated. The BoE acknowledged this in its latest communication, stating that “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.” Like the Federal Reserve, the BoE now appears to be in data-dependent mode, signaling a cautious, wait-and-see stance. Meanwhile, growth expectations remain subdued. In February, the BoE halved its 2025 GDP forecast for the UK to just 0.75%, stressing the delicate balance policymakers must strike between managing inflation and supporting a still-fragile recovery.
Japan
Japanese equities declined 4.4% in Q1, dragged down by weak performance in large-cap tech and uncertainty around U.S. trade tariffs. Concerns over a potential U.S. recession also weighed on sentiment, particularly for exporters.
On the domestic front, the Bank of Japan continued its shift away from ultra-loose policy, raising rates again after exiting negative territory in late 2024. This was supported by rising “core-core” inflation, which hit 2.6%, and strong wage gains from the shunto negotiations. Optimism around the end of deflation and ongoing corporate reforms continues to offer some support to the market’s longer-term outlook.
Emerging Markets
Emerging market equities posted gains of 2.9% in Q1 2025, with the MSCI EM Index outperforming U.S. markets. Despite a backdrop dominated by trade tensions and policy uncertainty out of the U.S., the asset class found support from a falling U.S. 10-year Treasury yield and a softer dollar, both tailwinds for EM performance.
China, the largest weight in the index, was a major contributor to the rally. Markets were buoyed by enthusiasm around the release of DeepSeek’s lower-cost AI model, which helped spark renewed interest in China’s tech sector. Momentum was further reinforced by a series of stimulus measures rolled out by the government, aimed at shoring up domestic demand and stabilizing growth.
Elsewhere, performance across EM was mixed but generally constructive. Brazil outperformed, helped by currency strength and continued rate hikes to combat inflation. South Korea saw a rebound thanks to recovering chip prices, while several Eastern European markets benefited from improving sentiment toward the Eurozone following Germany’s fiscal pivot. However, not all markets fared as well. Taiwan and India lagged, hit by concerns over trade policy and slowing tech demand.
Fixed Income
Performance in traditional fixed income markets shined to start the year as trade policy and economic uncertainty sparked a sell-off in risk assets, allowing bonds to reclaim their role as safe haven assets in times of volatility. As a result, the Bloomberg Global Aggregate Index gained 2.6% in the first quarter.
US Treasuries
Immediately following the new administration’s arrival in January, policy announcements came rapidly and unpredictably, each one shifting expectations around trade and, by extension, the broader economy. Interest rates within US markets batted between the contradictory effects of dampening economic expectations and persistent inflation concerns, further complicated by tariff price impacts. Ultimately, the former prevailed, creating a meaningful pullback in treasury yields and a corresponding rally in bond prices. The Federal Reserve held its policy rate and while noting an elevated level of economic uncertainty, hard data has not deteriorated enough to warrant action. Markets digested this information by pricing in another cut from the Fed in 2025, helping treasuries outperform many risk assets and much of the fixed income landscape. The Bloomberg US Treasury Index returned 2.9%.
Corporate Credit
Despite delivering positive performance as equity markets struggled, corporate bonds underperformed treasuries as the risk-off move generated a drag on credit markets. As investor sentiment softened, spreads widened from all time low levels as they began pricing in more economic uncertainty and raising risks of companies being unable to meet their debt obligations. Higher quality bonds made stronger gains in the quarter given both their higher price sensitivity to falling interest rates and less spread widening given their safety relative to their lower quality counterparts. That divergence was evident in performance as investment grade bonds rose 2.3% while high yield debt returned 1.0%.
Global Bonds
International fixed income returns diverged as the economic backdrop and policy expectations for regions developed. UK Gilts held onto slight gains as questions around global economic stability created some downward pressure on yields. German Bunds, the primary proxy for European Union bonds, struggled as Germany’s parlement approved meaningful shifts in their fiscal playbook by excluding spending on defense and security from the country’s rules on debt issuance. The promises of government spending to come improved the outlook for what was a struggling European economy, leading to a rise in yields. Japanese bonds underperformed their developed market peers as strong economic data and the central bank indicating rate hikes as likely led to a pullback.
Alternatives
Q1 2025 reminded investors why alternatives are anything but an afterthought. As public markets whipsawed on macro headlines and policy pivots, alts offered a mixed bag of risk, refuge, and return. From hedge fund dispersion to commodity breakouts and a crypto shakeout, the quarter tested conviction and rewarded selectivity.
Private Equity
Private equity entered 2025 with cautious optimism as the macroeconomic backdrop evolved. Following a resilient fourth quarter in public markets, general partners hoped for a reset in dealmaking conditions. Fundraising remained a tale of two markets. Established managers with strong track records continued to attract capital, albeit with longer fundraising cycles, while emerging managers struggled to gain traction. Deal activity ticked higher versus Q4, particularly in the middle market where buyers and sellers were finally meeting somewhere in the middle after nearly two years of bid-ask spread standstill. Overall, the asset class appears to be moving from “wait and see” to “selectively engage,” with dry powder levels still near all-time highs. Managers are prioritizing operational improvements and bolt-on acquisitions while exit markets remain lumpy.
Private Credit
Private credit continues to be the story of capital efficiency and yield generation. With traditional bank lending still constrained and higher rates keeping private borrowers on edge, direct lenders remained well positioned in Q1. New deal flow accelerated across both sponsored and non-sponsored borrowers, driven by refinancing needs and M&A. The floating-rate nature of many private credit deals helped preserve yields amid rate uncertainty. Investors showed particular interest in asset-based lending and structured credit strategies, where real collateral backed attractive spreads. Distressed and special situations funds also started ramping up deployment, especially in retail, real estate, and smaller manufacturing credits feeling the squeeze of higher input costs and softening consumer demand.
Hedge Funds
Q1 was a mixed bag for hedge funds, depending on where you looked. Global macro and relative value strategies found opportunity amid the chaos, profiting from interest rate differentials and volatility across currencies and commodities. Meanwhile, long/short equity funds got whiplashed trying to chase momentum in an increasingly macro-driven market. With dispersion at decade highs, the best-performing managers proved their worth, while the beta-chasers were exposed.
Commodities
Precious metals led the way, with gold shining brightest. Investors sought shelter as tariff policy ping-ponged out of Washington and inflation talk returned to the headlines. The result? A stampede toward real assets. Silver followed suit, though with a more muted rally, while industrial metals lagged, dragged down by mounting global growth concerns and a shaky manufacturing outlook.
Energy markets struggled to find direction. Oil prices wobbled as the Russia-Ukraine conflict continued to disrupt supply chains. Meanwhile, escalating tensions in the Middle East and growing uncertainty around China-Taiwan relations dampened demand expectations, keeping crude in check. Natural gas remained a rollercoaster, driven by volatile weather patterns and fluctuating European storage levels.
Agricultural commodities, meanwhile, had their moment in the sun. Corn and wheat prices climbed on the back of lower global yields and erratic export data. Cocoa surged to record highs amid tight supply and speculative flows.
Cryptocurrencies
For a moment, it looked like the stars were aligning, Trump-era pro-crypto rhetoric, expanding ETF access, and institutional buy-in all pointed to a breakout quarter. But crypto markets had other plans. In classic fashion, just as optimism peaked, volatility returned. Bitcoin and Ethereum gave up early gains as regulatory overhangs persisted, and traders unwound leveraged positions. What began as a potential breakout turned into a painful shakeout. Still, the long-term thesis remains intact for believers, but Q1 was a reminder: crypto never takes the straight path.
Q1 2025 Market Commentary
Domestic Equities
U.S. equity markets posted steep declines in the first quarter of 2025, rattled by escalating trade tensions, fading enthusiasm for AI-driven growth, and signs of softening economic momentum. The S&P 500 fell 5.8%, the Nasdaq Composite dropped 7.3%, and the Dow Jones Industrial Average lost 4.2%, marking the worst quarterly performance since 2022.
Tariff-related headlines dominated the quarter. In February, the Trump administration imposed new tariffs on imports from Mexico, Canada, and China, followed by additional levies on autos, steel, and aluminum in March. As the quarter closed, attention turned to the next wave of measures expected on April 2—dubbed “Liberation Day” by the White House—which promises a broader and more aggressive tariff rollout, including a 37% duty on Chinese imports. The uncertainty surrounding the administration’s trade policy significantly weighed on investor sentiment and prompted companies to reassess investment and hiring plans. The University of Michigan’s consumer sentiment index for March plunged to 57.0, down sharply from 64.7 in February, reflecting growing anxiety about inflation, job cuts, and economic direction.
Sector performance reflected the underlying rotation. Information Technology and Consumer Discretionary stocks led the market lower, both posting steep losses as enthusiasm for AI leadership waned and economic concerns heightened. A notable headwind came from China’s DeepSeek, which unveiled an AI model with performance on par with market leaders but reportedly at a significantly lower cost. The development forced a market-wide reassessment of U.S. tech dominance and the profitability assumptions embedded in the “Magnificent Seven” mega-cap stocks. In contrast, Energy and Healthcare sectors posted gains during the quarter, benefitting from macro tailwinds and a shift toward more defensive positioning.
The Federal Reserve held rates steady throughout the quarter, but softening economic data and increased financial market stress prompted a notable shift in expectations. By the end of March, markets were pricing in a 40% probability of a rate cut at the May meeting. The 10-year Treasury yield fell below 4% for the first time since November, reflecting both a flight to safety and growing concerns about the economic outlook.
Economic indicators were mixed. Job growth remained positive but slowed from prior quarters, while inflation continued to run above target. The manufacturing sector remained in contraction territory, though services showed modest expansion. As the quarter ended, attention turned to the upcoming CPI and PPI reports in early April, along with earnings from major banks and asset managers, which could help gauge the durability of consumer and business confidence.
Looking ahead, unless tariff tensions ease or the Fed signals a clearer dovish pivot, market volatility is likely to remain elevated. The first quarter served as a wake-up call that geopolitics and policy shifts can quickly upend even the most well-anchored narratives.
Foreign Equities
Like the internal micro rotation within U.S equity markets Eurozone equity markets, investors rotated away from the U.S. exceptional consensus opinion and into the unloved foreign equity markets as the MSCI ACWI ex-USA index outperformed, returning 5.3% for the first quarter of 2025.
Eurozone
Although growth concerns and the negative effects of trade policy dominated the narrative heading into 2025, a rotation out of U.S. equities into the Eurozone was a key theme in the first quarter. Financials led the way, supported by strong bank earnings and relative insulation from tariff-related risks. In contrast, consumer discretionary and technology stocks, mirroring trends seen in the U.S., were the weakest performers. The MSCI EMU Index declined 4.3% for the quarter.
In Germany, February’s elections saw Friedrich Merz’s Christian Democrats (CDU) emerge as the largest party. Even before formally forming a government, Merz moved swiftly to implement a significant fiscal policy shift. Parliament approved plans to loosen Germany’s strict borrowing rules, carving out exemptions for defense and security spending, and authorizing the creation of a €500 billion infrastructure fund. Long associated with budgetary restraint and underinvestment, Germany is now poised to substantially increase public spending, potentially lifting the investment-to-GDP ratio by more than two percentage points annually, a major departure from its traditional economic model.
Meanwhile, the European Central Bank (ECB) cut interest rates again in March, bringing its key rate down to 2.5%, a full two percentage points lower than at the start of 2024 and the sixth cut in the last nine months. Despite the easing, the ECB struck a more hawkish tone in its guidance, stating, “Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up.” The statement suggests further cuts may be on the table, though it also hints at a potential pause later in 2025. Inflation moderated to 2.3% in February, down slightly from 2.5% in January, but overall growth remains subdued. Business confidence continues to be challenged by the evolving global trade environment.
UK
Like the Eurozone, UK equities managed to outperform the U.S. in the first quarter, thanks largely to strong showings from big-name companies. Large caps in financials, energy, and healthcare led the charge as global investors continued to rotate out of pricey U.S. tech stocks. On the other hand, small and mid-sized UK companies continued to struggle, weighed down by uncertainty around the country’s economic outlook. The MSCI UK Index rose 6.4%.
On the policy front, the Bank of England (BoE) held rates steady after a 25bps cut in February. While inflation has cooled slightly, easing to 2.8% in February from 3.0% in January, it remains elevated. The BoE acknowledged this in its latest communication, stating that “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.” Like the Federal Reserve, the BoE now appears to be in data-dependent mode, signaling a cautious, wait-and-see stance. Meanwhile, growth expectations remain subdued. In February, the BoE halved its 2025 GDP forecast for the UK to just 0.75%, stressing the delicate balance policymakers must strike between managing inflation and supporting a still-fragile recovery.
Japan
Japanese equities declined 4.4% in Q1, dragged down by weak performance in large-cap tech and uncertainty around U.S. trade tariffs. Concerns over a potential U.S. recession also weighed on sentiment, particularly for exporters.
On the domestic front, the Bank of Japan continued its shift away from ultra-loose policy, raising rates again after exiting negative territory in late 2024. This was supported by rising “core-core” inflation, which hit 2.6%, and strong wage gains from the shunto negotiations. Optimism around the end of deflation and ongoing corporate reforms continues to offer some support to the market’s longer-term outlook.
Emerging Markets
Emerging market equities posted gains of 2.9% in Q1 2025, with the MSCI EM Index outperforming U.S. markets. Despite a backdrop dominated by trade tensions and policy uncertainty out of the U.S., the asset class found support from a falling U.S. 10-year Treasury yield and a softer dollar, both tailwinds for EM performance.
China, the largest weight in the index, was a major contributor to the rally. Markets were buoyed by enthusiasm around the release of DeepSeek’s lower-cost AI model, which helped spark renewed interest in China’s tech sector. Momentum was further reinforced by a series of stimulus measures rolled out by the government, aimed at shoring up domestic demand and stabilizing growth.
Elsewhere, performance across EM was mixed but generally constructive. Brazil outperformed, helped by currency strength and continued rate hikes to combat inflation. South Korea saw a rebound thanks to recovering chip prices, while several Eastern European markets benefited from improving sentiment toward the Eurozone following Germany’s fiscal pivot. However, not all markets fared as well. Taiwan and India lagged, hit by concerns over trade policy and slowing tech demand.
Fixed Income
Performance in traditional fixed income markets shined to start the year as trade policy and economic uncertainty sparked a sell-off in risk assets, allowing bonds to reclaim their role as safe haven assets in times of volatility. As a result, the Bloomberg Global Aggregate Index gained 2.6% in the first quarter.
US Treasuries
Immediately following the new administration’s arrival in January, policy announcements came rapidly and unpredictably, each one shifting expectations around trade and, by extension, the broader economy. Interest rates within US markets batted between the contradictory effects of dampening economic expectations and persistent inflation concerns, further complicated by tariff price impacts. Ultimately, the former prevailed, creating a meaningful pullback in treasury yields and a corresponding rally in bond prices. The Federal Reserve held its policy rate and while noting an elevated level of economic uncertainty, hard data has not deteriorated enough to warrant action. Markets digested this information by pricing in another cut from the Fed in 2025, helping treasuries outperform many risk assets and much of the fixed income landscape. The Bloomberg US Treasury Index returned 2.9%.
Corporate Credit
Despite delivering positive performance as equity markets struggled, corporate bonds underperformed treasuries as the risk-off move generated a drag on credit markets. As investor sentiment softened, spreads widened from all time low levels as they began pricing in more economic uncertainty and raising risks of companies being unable to meet their debt obligations. Higher quality bonds made stronger gains in the quarter given both their higher price sensitivity to falling interest rates and less spread widening given their safety relative to their lower quality counterparts. That divergence was evident in performance as investment grade bonds rose 2.3% while high yield debt returned 1.0%.
Global Bonds
International fixed income returns diverged as the economic backdrop and policy expectations for regions developed. UK Gilts held onto slight gains as questions around global economic stability created some downward pressure on yields. German Bunds, the primary proxy for European Union bonds, struggled as Germany’s parlement approved meaningful shifts in their fiscal playbook by excluding spending on defense and security from the country’s rules on debt issuance. The promises of government spending to come improved the outlook for what was a struggling European economy, leading to a rise in yields. Japanese bonds underperformed their developed market peers as strong economic data and the central bank indicating rate hikes as likely led to a pullback.
Alternatives
Q1 2025 reminded investors why alternatives are anything but an afterthought. As public markets whipsawed on macro headlines and policy pivots, alts offered a mixed bag of risk, refuge, and return. From hedge fund dispersion to commodity breakouts and a crypto shakeout, the quarter tested conviction and rewarded selectivity.
Private Equity
Private equity entered 2025 with cautious optimism as the macroeconomic backdrop evolved. Following a resilient fourth quarter in public markets, general partners hoped for a reset in dealmaking conditions. Fundraising remained a tale of two markets. Established managers with strong track records continued to attract capital, albeit with longer fundraising cycles, while emerging managers struggled to gain traction. Deal activity ticked higher versus Q4, particularly in the middle market where buyers and sellers were finally meeting somewhere in the middle after nearly two years of bid-ask spread standstill. Overall, the asset class appears to be moving from “wait and see” to “selectively engage,” with dry powder levels still near all-time highs. Managers are prioritizing operational improvements and bolt-on acquisitions while exit markets remain lumpy.
Private Credit
Private credit continues to be the story of capital efficiency and yield generation. With traditional bank lending still constrained and higher rates keeping private borrowers on edge, direct lenders remained well positioned in Q1. New deal flow accelerated across both sponsored and non-sponsored borrowers, driven by refinancing needs and M&A. The floating-rate nature of many private credit deals helped preserve yields amid rate uncertainty. Investors showed particular interest in asset-based lending and structured credit strategies, where real collateral backed attractive spreads. Distressed and special situations funds also started ramping up deployment, especially in retail, real estate, and smaller manufacturing credits feeling the squeeze of higher input costs and softening consumer demand.
Hedge Funds
Q1 was a mixed bag for hedge funds, depending on where you looked. Global macro and relative value strategies found opportunity amid the chaos, profiting from interest rate differentials and volatility across currencies and commodities. Meanwhile, long/short equity funds got whiplashed trying to chase momentum in an increasingly macro-driven market. With dispersion at decade highs, the best-performing managers proved their worth, while the beta-chasers were exposed.
Commodities
Precious metals led the way, with gold shining brightest. Investors sought shelter as tariff policy ping-ponged out of Washington and inflation talk returned to the headlines. The result? A stampede toward real assets. Silver followed suit, though with a more muted rally, while industrial metals lagged, dragged down by mounting global growth concerns and a shaky manufacturing outlook.
Energy markets struggled to find direction. Oil prices wobbled as the Russia-Ukraine conflict continued to disrupt supply chains. Meanwhile, escalating tensions in the Middle East and growing uncertainty around China-Taiwan relations dampened demand expectations, keeping crude in check. Natural gas remained a rollercoaster, driven by volatile weather patterns and fluctuating European storage levels.
Agricultural commodities, meanwhile, had their moment in the sun. Corn and wheat prices climbed on the back of lower global yields and erratic export data. Cocoa surged to record highs amid tight supply and speculative flows.
Cryptocurrencies
For a moment, it looked like the stars were aligning, Trump-era pro-crypto rhetoric, expanding ETF access, and institutional buy-in all pointed to a breakout quarter. But crypto markets had other plans. In classic fashion, just as optimism peaked, volatility returned. Bitcoin and Ethereum gave up early gains as regulatory overhangs persisted, and traders unwound leveraged positions. What began as a potential breakout turned into a painful shakeout. Still, the long-term thesis remains intact for believers, but Q1 was a reminder: crypto never takes the straight path.