Wealth Management Insights for Q1 2025

Market Update

Equity markets plunged in response to the announcement of far-reaching tariffs by President Trump. Given the potential tariff impact—estimated to be approximately $600 billion, nearly 2% of GDP—this letter will lead with our assessment of the most recent developments, followed by an abbreviated review of Q1 and our thoughts about the outlook and portfolio positioning.

Tariffs are essentially a tax on consumption, typically leading to higher prices for imported goods. Economic and earnings growth estimates have been revised downward in response to the tariff announcement, while the odds of a US recession have become significantly higher. Economic and policy uncertainty is having a meaningful impact on corporate spending and capital markets activity, with recent announcements of capital spending being put on hold and IPOs being postponed or downsized.

The S&P 500 had its two worst sessions since 2020 on April 3 and 4, falling 4.8% and 6%. Global equities were weak as well. Companies with the most globally focused sales and supply chains were hit hard, as were equity markets in countries such as Vietnam that were targeted by the steepest tariffs.

Bond prices rose, with 10-year yields—which move inversely to prices—falling below 4%. The fall in bond yields reflects the expectation that tariffs will cause an immediate price shock that depresses economic growth rather than a persistent rise in inflation, and that the Fed will cut rates multiple times between now and year-end.

Q1 Review

US equities fell in Q1, as the S&P 500 fell 4.3% in posting its worst quarter since the third quarter of 2022, and the Nasdaq and small-cap Russell 2000 were also weak. Non-US markets were up strongly in the quarter, with positive developments in Germany and China among the catalysts for a long-awaited rebound relative to US stocks.

Equity market weakness toward the end of the quarter was driven by growth fears that followed uncertainty around tariffs and the broader Trump policy agenda. Disappointing economic data, slowing progress in bringing inflation down, and worries about the AI growth narrative also contributed to the selloff in the latter part of the quarter.

Treasuries rallied with the two-year yield falling to near the lowest levels since October 2024, while 10-year yields fell to approximately 4.20%. Gold gained 19.3%, the best quarterly performance since 1986.

	Q1
Equity
MSCI All Country World Index	-1.2%
S&P 500 Index	-4.3%
NASDAQ Composite Index	-10.3%
Russell 2000 Index	-9.5%
MSCI World ex-US Index	6.4%
MSCI Emerging Markets Index	3.0%
Fixed Income
Bloomberg Aggregate Index	2.8%
Bloomberg 1–5 Year Gov/Credit	2.0%
Bloomberg Municipals	-0.2%
Bloomberg 1–3 Month T-Bill	1.0%

Market Outlook

The Trump administration is hoping that short-term pain in the form of higher consumer prices will lead to a long-term manufacturing renaissance, but investors are concerned about the uncertain magnitude and timing of re-shoring initiatives. The experience with tariffs in 2018 provides insight into possible unintended consequences from last week’s actions. For example, although steel tariffs created an estimated 1,000 jobs for steelmakers protected by tariffs, they reduced employment by 75,000 in industries such as autos and construction as input prices rose and sales fell. The best case is for the pain from rising prices to be felt immediately while the potential gain from either more manufacturing jobs or shifting US consumption to services will take time to materialize.

We are expecting fiscal and monetary responses to offset some of the impact of tariffs on growth, inflation, and employment. The Fed may not “come to the rescue” immediately, as it will be hard for them to act with inflation remaining meaningfully above 2% and a job market in which nonfarm payrolls rose a solid 228,000 in March. Rate cuts are coming, but probably not until job growth slows and unemployment rises.

The impact on growth caused by tariffs may spur Congress to move faster to pass a budget and extend the Tax Cuts and Jobs Act (TCJA). The anticipated revenue from tariffs will likely be used to support an expansion of the TCJA, potentially offsetting some of the impact of tariffs on corporate profits.

It is also possible that tariffs will be negotiated downward or that court challenges lead to changes that soften the impact, but those seem to be less likely near-term outcomes.

Portfolio Positioning

The market sell-off creates compelling long-term investment opportunities amidst abundant near-term risks and elevated uncertainty. Given the fluid policy environment and heated rhetoric, it is easy to lose sight of the underlying strength of the US economy. We began 2025 after a great year for corporate profits, a downward trajectory for inflation, and strong corporate and household balance sheets. The US economy, as a services-oriented economy that continues to be a world leader in innovation, is ultimately going to be resilient despite near-term challenges.

Our portfolio strategy in this environment is to strike a balance between seeking opportunity and managing risk. We are looking to add or add to investments that we believe have sold off excessively, while making sure that our investments will be resilient enough to get to the “other side” of a period in which economic and policy uncertainty is the highest since the pandemic. Liquidity is of critical importance in times like this, so our fixed-income portfolios continue to emphasize liquid, high-quality fixed-income assets.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation.

If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

Key Contacts

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com

Matthew Martino, CFA
Senior Director of Portfolio Strategy
+1 617.345.1122
mmartino@nixonpeabody.com