What a difference six weeks makes! If this piece had been penned in the middle of February, the tone would have been much different. The S&P 500 reached a recent peak at 6,144 on February 19, 2025, only to fall approximately 10%, closing out the first quarter down 4.6% — its first negative quarter since 2022.
Now, let’s put things into perspective. The market is down just 4.6% thus far in 2025 after back-to-back years of gains exceeding 25% in 2023 and 2024. What’s striking to us is how quickly sentiment has turned negative. The prevailing mindset seems to be: “What have you done for me lately?” Admittedly, this was the fifth-fastest 10% correction in the market – ever. However, negative sentiment is usually a wonderful contrarian indicator. We get excited when everyone turns bearish — low expectations are much easier to surpass and typically lead to larger stock market gains.
This year’s first quarter performance looks much different from 2023 and 2024. International stocks have outperformed domestic by the largest amount in over 30 years. Value stocks have bested growth stocks. Gold has beaten Bitcoin by having its best quarter since 1986. The latter two show a very risk-off, defensive posture in the market. We were not positioned to benefit from any of these occurrences. We do not think these short-term trends are sustainable nor do we plan to chase them at this point.
We think it’s important to ask what has changed since mid-February and if we should be making structural changes in our portfolios.
What has changed?
There is an incredible amount of uncertainty in the world and that has led to a crisis in confidence across the board. There was market euphoria after the election last November that has not come to fundamental fruition yet. Stocks got ahead of themselves. The lack of clarity starts with political tensions related to global military conflicts, trade wars, tariffs, taxes, DOGE, and regulation. The clouds in these areas have caused pause among consumers, business owners, and CEOs. How can one be expected to make an important decision when we don’t know the rules of the game?
Should we make structural changes in our portfolios? My short answer is no…for now. Stock market corrections are very normal, and one should not run and hide (or market time) each time they transpire. History has shown us that staying the course with appropriate asset allocation wins out in the end. Please note the chart below which shows the difference in performance when missing the best days of market returns. Even over a 25-year period, missing the ten best days almost cuts performance in half.
The things we are watching most closely in the near term:
Forward earnings visibility and capital expenditure – Many companies will report 1st quarter calendar earnings starting in the middle of April. We’re less interested in the past quarter’s results as we are laser-focused on forward guidance and visibility. The key question is: How much has the uncertainty noted above affected business investment? Our concern is the longer the murkiness exists, the larger the potential damage will be. We are also concerned that CEOs will guide down future profit expectations. While the market correction has significantly lowered price/earnings multiples, if the earnings are currently overstated, then stock prices will fall further. If the earnings estimates stay intact, then stocks at current prices are cheap.
The market reaction to future “bad” news – With sentiment as bearish as it is, we maintain that even bad news will be better than the current uncertainty. When the market (and individual stocks) stops going down on bad macroeconomic news we will know the worst is behind us.
Credit spreads – Year to date, spreads have widened only slightly — rising just 10 basis points. This is a great way to weigh if there is stress in the financial markets. Are lenders requiring a higher rate of return to extend credit? So far, there has been no market dislocation in investment-grade credit.
Jobs – The labor market remains resilient, albeit slowing a bit from white-hot levels. Over the past two years, non-farm payroll growth has consistently ranged between 100,000 and 200,000 per month. Meanwhile, job openings have remained above 7.5 million for the past 18 months, and unemployment has held steady at 4%. In a consumer-driven economy, a strong job market is critical — and so far, hiring and employment levels remain steady.
What do we do now?
Our base case remains that the U.S. will avoid a recession in 2025m, although we’ve moderately increased the odds of having one due to the heightened, drawn-out uncertainty (everything is probability-based). That said, stay the course. Do not panic. While negative numbers are never ideal, your portfolio remains well-positioned with high-quality stocks and bonds.
Market timing is a fool’s errand — we have yet to meet anyone who can do it successfully. Conversely, what proves to win each and every time is to persevere through the noise, believe in the U.S. economy, and stay focused on the long term to avoid costly, shortsighted mistakes. You’re invested in rock-solid companies with strong balance sheets and significant cash flow.
As we’ve written before, we were not expecting the markets to shoot the lights out in 2025. However, we still believe returns can reach the high single digits this year, which would still complete the three-peat of three consecutive years of positive returns.
Insights
Quarterly Review: Q1 2025
What a difference six weeks makes! If this piece had been penned in the middle of February, the tone would have been much different. The S&P 500 reached a recent peak at 6,144 on February 19, 2025, only to fall approximately 10%, closing out the first quarter down 4.6% — its first negative quarter since 2022.
Now, let’s put things into perspective. The market is down just 4.6% thus far in 2025 after back-to-back years of gains exceeding 25% in 2023 and 2024. What’s striking to us is how quickly sentiment has turned negative. The prevailing mindset seems to be: “What have you done for me lately?” Admittedly, this was the fifth-fastest 10% correction in the market – ever. However, negative sentiment is usually a wonderful contrarian indicator. We get excited when everyone turns bearish — low expectations are much easier to surpass and typically lead to larger stock market gains.
This year’s first quarter performance looks much different from 2023 and 2024. International stocks have outperformed domestic by the largest amount in over 30 years. Value stocks have bested growth stocks. Gold has beaten Bitcoin by having its best quarter since 1986. The latter two show a very risk-off, defensive posture in the market. We were not positioned to benefit from any of these occurrences. We do not think these short-term trends are sustainable nor do we plan to chase them at this point.
We think it’s important to ask what has changed since mid-February and if we should be making structural changes in our portfolios.
What has changed?
There is an incredible amount of uncertainty in the world and that has led to a crisis in confidence across the board. There was market euphoria after the election last November that has not come to fundamental fruition yet. Stocks got ahead of themselves. The lack of clarity starts with political tensions related to global military conflicts, trade wars, tariffs, taxes, DOGE, and regulation. The clouds in these areas have caused pause among consumers, business owners, and CEOs. How can one be expected to make an important decision when we don’t know the rules of the game?
Should we make structural changes in our portfolios? My short answer is no…for now. Stock market corrections are very normal, and one should not run and hide (or market time) each time they transpire. History has shown us that staying the course with appropriate asset allocation wins out in the end. Please note the chart below which shows the difference in performance when missing the best days of market returns. Even over a 25-year period, missing the ten best days almost cuts performance in half.
The things we are watching most closely in the near term:
Forward earnings visibility and capital expenditure – Many companies will report 1st quarter calendar earnings starting in the middle of April. We’re less interested in the past quarter’s results as we are laser-focused on forward guidance and visibility. The key question is: How much has the uncertainty noted above affected business investment? Our concern is the longer the murkiness exists, the larger the potential damage will be. We are also concerned that CEOs will guide down future profit expectations. While the market correction has significantly lowered price/earnings multiples, if the earnings are currently overstated, then stock prices will fall further. If the earnings estimates stay intact, then stocks at current prices are cheap.
The market reaction to future “bad” news – With sentiment as bearish as it is, we maintain that even bad news will be better than the current uncertainty. When the market (and individual stocks) stops going down on bad macroeconomic news we will know the worst is behind us.
Credit spreads – Year to date, spreads have widened only slightly — rising just 10 basis points. This is a great way to weigh if there is stress in the financial markets. Are lenders requiring a higher rate of return to extend credit? So far, there has been no market dislocation in investment-grade credit.
Jobs – The labor market remains resilient, albeit slowing a bit from white-hot levels. Over the past two years, non-farm payroll growth has consistently ranged between 100,000 and 200,000 per month. Meanwhile, job openings have remained above 7.5 million for the past 18 months, and unemployment has held steady at 4%. In a consumer-driven economy, a strong job market is critical — and so far, hiring and employment levels remain steady.
What do we do now?
Our base case remains that the U.S. will avoid a recession in 2025m, although we’ve moderately increased the odds of having one due to the heightened, drawn-out uncertainty (everything is probability-based). That said, stay the course. Do not panic. While negative numbers are never ideal, your portfolio remains well-positioned with high-quality stocks and bonds.
Market timing is a fool’s errand — we have yet to meet anyone who can do it successfully. Conversely, what proves to win each and every time is to persevere through the noise, believe in the U.S. economy, and stay focused on the long term to avoid costly, shortsighted mistakes. You’re invested in rock-solid companies with strong balance sheets and significant cash flow.
As we’ve written before, we were not expecting the markets to shoot the lights out in 2025. However, we still believe returns can reach the high single digits this year, which would still complete the three-peat of three consecutive years of positive returns.