The first quarter of 2025 delivered heightened volatility across markets, driven by rising trade tensions, diverging global central bank policies, and renewed inflation worries. U.S. equities underperformed while international assets and fixed income showed relative strength. In this month’s Ceva Insights, we distill what happened, why it matters, and how investors should be thinking about positioning in Q2.
Key Highlights: Navigating March of 2025
- U.S. Equities Lag: S&P 500 fell -4.3% in Q1, led by a -16% drop in the Magnificent 7.
- Europe Outperforms: STOXX 600 rose +5.9%, the biggest gap over U.S. stocks in a decade.
- Flight to Safety: Gold rallied +19%; U.S. Treasuries returned +2.9%.
- Policy Divergence: ECB cut rates; Fed paused; BoJ hiked. Markets await April 2 tariffs and April 10 CPI.
Economic Overview
Q1 saw a swing from optimism to caution as tariffs, inflation surprises, and weakening sentiment dampened the outlook. While jobs data and early January momentum started strong, inflation fears quickly regained traction. Tariffs spurred new concerns about rising input costs, which added to already elevated inflation pressures globally. Consumer sentiment also weakened notably by March, reflecting concerns about stagnating growth.
Highlights:
- U.S. imposed 25% tariffs on key partners; more expected to follow on April 2nd with Trump’s dubbed “Liberation Day.”
- Market-based inflation expectations jumped; 1-year inflation swap rose 72 bps to 3.25%—its highest in two years.1
- University of Michigan long-term inflation expectations hit 4.1% – highest since 1993.
- The Fed’s preferred inflation measure (core PCE) rose at a 3.6% annualized rate in February.
- Consumer confidence fell to 92.9 – weakest since early 2021; expectations index hit its lowest point since 2013.1
- European elections led to major fiscal easing and higher defense outlays.
Equities
After a strong January, U.S. equities faltered under valuation pressure, policy uncertainty, and tech underperformance. The “priced to perfection” narrative unraveled as investors rotated towards income and portfolio rebalances towards respectively cheaper international companies. We saw a technical correction in the S&P 500 with a dramatic fall of -10.08% from the peak in late February. As a result of all the volatility and uncertainty, year-end targets have been adjusted as investors weigh the risks present in the market.
Adding to the concern, U.S. equities severely lagged global peers. Relative to global ex-U.S. markets, the U.S. saw its worst quarterly underperformance in over two decades.2 This marks a sharp shift in sentiment about the U.S. investment outlook, with many attributing the change to recent political developments, particularly trade policy decisions.
Highlights:
- S&P 500 down -4.3% Q1; worst quarter since Q3 2022.1
- Magnificent 7 fell into bear market territory with a -16% return in Q1.1
- Goldman Sachs revised 2025 S&P 500 target to 5700 from 6200.2
- STOXX 600 +5.9%, DAX +11.3% on fiscal optimism.1
- A Goldman Sachs analyst lowered her target for the STOXX 600 (European Index), implying a 4.5% drop from yesterday’s close.
- The S&P 500 fell -5.6% in March alone—its worst month since 2022.
Fixed Income
Bonds proved resilient in Q1 as slowing growth and falling yields attracted capital. U.S. Treasuries offered strong returns, with rates down from January highs. Central banks are no longer moving in sync, opening up global fixed income opportunities. All eyes will be on the actions of the administration, inflation data, and Fed officials as we move through the rest of the year.
Highlights:
- 10-year Treasury yield dropped from 4.56% to 4.21% in Q1.
- U.S. Treasuries returned +2.9%; still offering attractive yields.
- Fed held rates steady; ECB cut twice; BoJ hiked.
- Inflation concerns persist, with swaps and PCE data pointing to stickier price pressures.
Looking Ahead
April is shaping up to be a pivotal month. Key policy and data releases could reset investor expectations and drive near-term market direction. Trade policy remains a major wildcard, with the April 2 tariff decisions potentially altering inflation dynamics and geopolitical tone. Meanwhile, the April 10 CPI report will be a litmus test for whether pricing pressures are cooling or persisting—critical to the Fed’s next steps.
We also expect greater clarity on fiscal spending in both the U.S. and Europe, which may influence sector rotations. Investors should watch for signs of stabilization in consumer sentiment, any forward guidance from the Fed or ECB, and how Q1 earnings reports begin to shape expectations for the rest of the year.
Near-Term Themes:
- April 2: Reciprocal tariff decisions with possible global trade repercussions.
- April 10: March CPI release—a key input for Fed rate trajectory.
- Late April: Start of Q1 earnings season.
- Ongoing: Market rotation into yield-focused and uncorrelated diversified strategies.
As uncertainty persists, maintaining balance and discipline is essential. Long-term investors should view pullbacks as opportunities to reassess positioning, focus on quality assets, and consider diversifiers like fixed income and alternatives. Reach out to someone on our team if you want to learn more about how we can help you position your investments in the volatile environment we are facing.
1 Allen, Henry and Jim Reid. “March and Q1 2025 Performance Review.” Deutsche Bank Research, April 1, 2025.
2 “Markets Daily: March 2 – March 31, 2025 Series.” Bloomberg, March 2 – March 31, 2025.
IMPORTANT DISCLOSURE: This article is produced by Ceva Capital LLC dba Ceva Advisors. The information contained in this report is informational and intended solely to provide educational content to our clients and other readers that we find relevant and interesting. Opinions expressed are just that, and are current only as of the data of publication Nothing in this document should be construed as investment advice; we provide advice on an individualized basis only after understanding your circumstances and needs. The information presented in this newsletter is based on reports from Deutsche Bank and Bloomberg’s ‘5 Things You Need to Know to Start Your Day’ series. Data provided comes from sources we believe are reliable, but accuracy is not guaranteed. Discussion of sectors and the performance of region-specific equities and bonds generally refers to market indices. We use the S&P 500 to represent US large-cap; the Willshire Small Cap to represent US small-cap; the MSCI ACWI ex US to represent international equities; the US 10-year Treasury Yield to represent US Treasuries; the ICE BofA European Government Bond Index to represent European bonds; the ICE BofA US Corporate Index Effective Yield to represent investment-grade bonds; the ICE BofA US High Yield Index Effective Yield to represent high-yield bonds. Indices are unmanaged, are not subject to investment management fees or transaction costs, and it is not possible to invest in an index. Index performance can provide general information about how a particular region or investment has performed, but does not provide information about the performance of Ceva’s client portfolios. Actual client performance may differ materially from the index performance discussed. Past performance is not a guarantee of future results. Financial planning is a tool that can help clients consider different current and future scenarios and construct portfolios designed to meet specific goals and address specific risks. Financial planning does not guarantee a positive outcome or prevent loss. It’s important to revisit financial plans and the underlying assumptions of those plans regularly, and to make adjustments as needed to respond to changing circumstances.
