Quarterly Report: Q1 2025

Q1 2025 – Tariff Tantrum & the “Lag” Seven      

As we entered 2025, the market was priced for perfection and undoubtedly another year of overcoming challenges and redefining limits against a backdrop of elevated U.S. equity market valuations, mega-cap dominance, and uncertainty surrounding the policy agenda of President Trump. Investors quickly found themselves in the crosshairs between the perception of a “business friendly” administration and uncertainty surrounding U.S. government policy, particularly trade and federal workforce reductions. This uncertainty surrounding trade policy and government layoffs drastically shifted investor sentiment and outlook, leading to the fastest market correction since the pandemic in March 2020. It took only 16 trading days for the S&P 500 to fall from its recent high into correction territory.  The Dow, which is comprised of fundamentally valued blue-chip companies, proved resilient and significantly outperformed the NASDAQ and S&P 500 on a relative basis with a return of -1.28%. The NASDAQ, which had been the biggest beneficiary of the post-election rally, underwent a steep correction and experienced the greatest decline of -10.42%. For the first time since 2023, the S&P 500 entered correction territory, but reclaimed some of the losses and ended the quarter with a -4.59% return. The rapid decline caught some investors by surprise, particularly given the favorable underlying condition stocks carried into 2025. The chart below illustrates the historical performance of the S&P 500 following correction; with the index overcoming its losses and trending higher in the following months (assuming it is not followed by a recession).

Source: Bloomberg and Apollo

As a result of the recent correction, the broad market is cheaper than it was when we entered the year, but it is certainly not inexpensive at these levels. Opportunities exist at the security selection level, which is why we strongly believe in active management. Currently, the market finds itself in a tug of war between growth vs. value and expensive vs. cheap.  S&P 500 companies reported 5% year-over-year revenue growth, while earnings per share increased 18.20% in the fourth quarter. 2024 marked the strongest year for earnings per share growth since 2021. However, analysts are becoming more cautious on 2025 corporate earnings with expectations forecasted to be in the mid-to-high single digits.     

Economic Developments: Moderating Growth

The U.S. labor market is experiencing a sluggish start to the year as February’s report showed an addition of only 151,000 jobs and January’s gain was revised lower to 125,000. While February’s report demonstrates some job market stability, it also indicates a cooling of the labor market compared to previous years. For reference, the average monthly gain in jobs was 215,000 in 2023 and 170,000 in 2024. At the current pace, it places 2025 at an average of 138,000. While federal government layoffs will likely drive jobless claims higher in the months ahead, the labor market remains healthy. With the unemployment rate still low at 4.10% and job openings exceeding unemployment, wage gains should remain in line or above inflation, supporting consumer spending and the economy.

The U.S. economy ended 2024 on a solid note with consumer spending continuing to drive growth. The economy expanded at 2.40% during the fourth quarter, bringing real economic growth to 2.80% in 2024. Furthermore, economic growth remains healthy but is moderating and forecasted to grow 1.70% in 2025 and 1.80% in 2026. The economy will not be immune to the effects of an escalating trade war in the short term.  Corporate America will adjust to the impacts from tariffs and use a combination of strategies to absorb some of the cost increases. Longer term, however, we still believe the biggest risk to the economic outlook comes from tariff policy and the potential for inflation to increase which could act as a headwind for the consumer and corporate earnings.                       

Federal Reserve: Wait-and-See Approach

At March’s Federal Reserve meeting, the Committee kept the policy rate unchanged and continued to signal the potential for two rate cuts later this year, bringing the policy rate down to a range of 3.75% to 4.00% from its current range of 4.25% to 4.50%. The updated Summary of Economic Projections indicates that the Federal Reserve sees a mildly stagflationary outlook comprised of slower economic growth and higher inflation. As such, the Federal Reserve announced that they will slow its balance sheet reduction program from $25 billion a month to $5 billion. The slowing of quantitative tightening will allow for easier monetary conditions. However, we expect additional rate cuts to remain on hold until there’s clarity on the implementation and impact of tariffs. The chart below illustrates the path of the fed funds rate, PCE inflation and the Federal Reserve’s inflation target since 2022 and the projections through 2027.

Sources: Federal Reserve, U.S Bureau of Economic Analysis

Fixed Income Markets: Range-Bound Yields    

After several years of fixed income markets being driven by central bank policy, this year investors will be paying close attention to the fiscal actions of the Trump administration. Despite uncertainties over policy shifts, the first quarter has been generally positive with bond yields remaining attractive amidst a resilient economy. We believe yields will remain range bound as the market attempts to decipher the true state of the economy. As such, we anticipate the U.S. Treasury 10-year to stay between 4% and 5.00%, as the tug-of-war between inflation and growth continue.

For the first time since January 2023, investors are being compensated for positioning out of cash and taking credit and duration risk. As such, bonds have effectively reasserted their value proposition both in terms of starting real yield and as a diversifier to more adverse economic scenarios. Both domestic and foreign bonds fared well with the Bloomberg Barclays Aggregate Bond index taking the lead with a quarter return of +2.54%, compared to foreign bonds at +2.41%.  Credit spreads widened in the back-half of February as tariff rhetoric ramped up and investors were presented with signs of cooling in the labor market. As such, we believe active management stands to benefit against an economic slowdown as credit spreads will likely continue to widen and weigh on valuations for lower quality corporate bonds. We continue to advise clients to focus on high-quality issues and maintain a duration stance slightly less than the benchmark.

International Markets: Exceptional Start

While 2025 has been full of surprises, the double-digit outperformance of international stocks over U.S. was on few economists’ forecasts. As such, international stocks are experiencing their best start to a year in a quarter of a century. Their outlook continues to brighten as central bank policy, earnings performance, and fiscal stimulus measures are expected to have a positive effect, especially if accompanied by deregulation. The performance divergence has largely been driven by uncertainty related to shifting U.S. policies and underperformance of the U.S. technology sector. The swift outperformance is why we advocate for geographical diversification in portfolios since it allows investors to benefit from pockets of outperformance in other areas of the world. The MSCI ACWI ex-US index returned +6.31%, the MSCI EAFE index returned +8.09%, and the MSCI Emerging Markets returned +4.50% for the first quarter of 2025.     

 
Thoughts on Asset Allocation 

While the market is experiencing a challenging start to the new year, we welcome the broadening away from the Magnificent Seven. The technology/Artificial Intelligence trade that carried indexes to an all-time high fizzled in the first quarter with the Magnificent Seven declining -15.40%. Notably, this marks a significant change in performance contribution as the Magnificent Seven contributed 60% and 54% of total index performance in 2023 and 2024. The broadening of the market’s opportunity beyond the Magnificent Seven is a favorable development for active management. Although geopolitical and macroeconomic factors will remain a feature for the market in the near term, careful security selection can help mitigate idiosyncratic risks. We believe active management, effective risk management, and a focus on fundamentals is the best way to navigate through what is likely to remain a complex and evolving market environment.       

Our Trust Investment Committee believes our current managers are poised to benefit from long-term and attractive investment themes. The managers continue to focus on strong corporate fundamentals in their security selection, and their favorable downside capture philosophy is paramount as we maneuver through challenging markets. Listed below is a subset of our equity and fixed-income managers that performed exceptionally well during the year against their benchmarks. 

*Returns are from actual portfolio results.  Results may vary.  Past performance is no guarantee of future returns.

We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.

For additional information, please contact Mason Williams, Chief Investment Officer, at 786-497-1214, or Michael Unger, Vice President/Investment Officer, at 786-292-0310.