As we move through 2025, markets continue to evolve in ways that both challenge and reward disciplined investors. Most major indices posted solid gains in Q1, extending the rally that began in late 2024. Tech led the way, buoyed by continued enthusiasm around artificial intelligence, cloud computing, and a rebound in semiconductor demand. The NASDAQ was the standout, fueled by strong earnings reports from mega-cap tech firms and improved guidance for the rest of the year. Meanwhile, small-cap stocks (as represented by the Russell 2000) also rebounded, signaling that investor confidence was expanding beyond the largest companies.
However, as the year has gone on, economic data has begun to suggest an impending deceleration in growth. The U.S. GDP growth rate slowed to an annualized 1.6%, reflecting weakening consumer demand and cautious corporate spending. Unemployment edged up to 4.5%, signaling a softening labor market, and core inflation rose to nearly 4%, driven by increased production costs associated with new tariffs. Additionally, corporate leaders have begun to express caution regarding future prospects. JPMorgan CEO Jamie Dimon warned of “considerable turbulence” ahead, citing geopolitical tensions and the potential impact of ongoing trade disputes.
The Federal Reserve held rates steady through Q1, opting for a wait-and-see approach as inflation trends downward. While market participants were initially hopeful for rate cuts early in the year, the Fed’s messaging has been consistent: rate reductions will come only when inflation shows sustained moderation. Fed Chair Jerome Powell struck a balanced tone in March, emphasizing data-dependency and noting that while the disinflation process is underway, the central bank is “not there yet” in terms of its confidence to ease.
Futures markets are now pricing in the first rate cut potentially in late Q2 or early Q3 — contingent on inflation continuing to ease and the labor market avoiding overheating. The Federal Reserve faces a complex challenge in addressing rising inflation while supporting economic growth. While some central banks, like the European Central Bank, have responded with rate cuts and quantitative easing, the Fed has maintained its policy stance, keeping rates at 4.5%. This cautious approach reflects the Fed’s commitment to controlling inflation but also raises questions about its flexibility in responding to a potential recession if economic growth stalls and inflation is reignited simultaneously. However, supporters of the current Fed stance argue that it may be prudent to show patience in adjusting rates amid the wave of uncertainty regarding fiscal policy and Trump’s trade agenda.
We would be remiss to provide this market update without addressing the recent developments around President Trump’s tariff regime, which has sent markets into a bout of volatility since the beginning of April. While initially focused on Mexico, Canada, and China over the first couple of months of his term, President Trump chose to expand his tariffs nearly worldwide in early April, with baseline tariffs of 10% on nearly every nation and additional retaliatory tariffs on top of that based on any existing tariffs that country has on the US. While a 90-day pause was announced last week, we expect to see continued volatility moving forward as this is a very fluid situation. We strongly feel that it is too early to make any drastic changes to portfolios in response to our countries new trade playbook, but we have made several changes over the past couple of years in anticipation of the current economic climate, including:
- Implementation of some alternative investments which tend to be more insulated from market volatility than public stocks (Morgan Stanley Structured Note and CIM Real Asset and Credit Fund)
- Extension of duration within the bond portion of your portfolio to help your assets participate in rate movements more effectively given the current environment
- Reduction of international equities relative to US equities to protect against a potentially strengthening dollar over the next few years and international trade relation induced volatility across international markets
- Removal of small cap equities from the portfolio, as this asset class tend to underperform and display more volatility during periods of market stress
Looking ahead, the economic landscape remains uncertain. In this environment, diversification and a focus on quality investments may be crucial to successful outcomes. Fixed income securities may offer stability, while sectors less sensitive to trade disruptions and/or alternative investment vehicles could provide some downside mitigation benefit as well. The market action we have seen so far in 2025 has underscored the importance of a disciplined investment strategy amid market volatility. While challenges persist, opportunities remain for well-positioned portfolios. We remain committed to guiding our clients through these uncertain times, emphasizing long-term objectives and prudent risk management.
Jake Fromm | Chief Investment Officer, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.