Quarterly Investment Update – 1st Quarter 2025 – Financial Services

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The rally in U.S. stocks came to an abrupt halt as uncertainty around tariffs, fiscal policy, and future economic growth put investors on edge.

United States
Finance and Banking

Stock Market Commentary

The rally in U.S. stocks came to an abrupt halt as uncertainty
around tariffs, fiscal policy, and future economic growth put
investors on edge. Technology and consumer discretionary stocks,
two of the best-performing sectors last year, were particularly
hard hit. The tech-heavy Nasdaq Composite Index and the broader
S&P 500 Index both fell into correction territory, declining
over 10% from their peak and ultimately ending the quarter down 10%
and 4.3%, respectively.

Despite the dour headlines, not all markets were negative.
International stocks, aided by a weakening U.S. dollar, posted
robust gains. The MSCI EAFE Index, which tracks the performance of
companies in developed markets including Japan and Europe, ended up
7%, the largest quarterly outperformance versus U.S. stocks since
2002. The MSCI Emerging Markets Index, which includes countries
such as China and India, also rose, up 3%. Even in the United
States, 7 out of 11 sectors were positive, led by energy and
healthcare.

While economic uncertainty and market volatility may remain
elevated in the near term, we continue to emphasize the importance
of diversification and periodic rebalancing. U.S. stocks,
particularly large technology companies, have been market leaders
in recent years, but investable opportunities do exist outside that
segment of the market.

Bond Market Commentary

In the first quarter of 2025, the fixed income market performed
well as a risk diversifier, with the Bloomberg US Aggregate Bond
Index rising 2.8% year-to-date. However, like equities, bond
markets experienced notable volatility due to the threat of
significant tariffs. These tariffs raised investor concerns about
higher inflation and slower economic growth, prompting a shift to
favor short-duration assets and a more defensive tactic in the
fixed income market.

As a result, corporate bond spreads widened in the first three
months of 2025. Highyield bond spreads spiked 78 basis points (bps)
from their January low, before tightening slightly, while
investment-grade spreads followed a similar pattern, rising
modestly by 15 bps since February.

The U.S. Federal Reserve acknowledged the rising risks to
economic stability and responded by maintaining the federal funds
rate at 4.25% to 4.5% and adopting a cautious approach. Other
central banks, however, adopted more aggressive policies for 2025.
Citing uncertainty over the impact of U.S. trade policies, the
European Central Bank, Swiss National Bank, and Bank of Canada each
cut their target rates by 25 bps in March.

Economic Commentary

In the first quarter of 2025, the U.S. economy found itself at a
crossroads, balancing modest growth against the rising pressures of
inflation and shifting global trade dynamics as various tariffs
went into effect, with the president estimating $600 billion in
tariff revenue per year, or 1.8% of current gross domestic product.
Inflation remained a pressing concern as the core Personal
Consumption Expenditures (PCE) price index, a key inflation
indicator, rose 2.8% year-over-year, slightly above
expectations.

In January and March, the Federal Reserve opted to hold interest
rates steady, saying it is in no hurry to lower them in the current
climate of uncertainty. The U.S. unemployment rate also held fast
at 4.2%, combating expectations of higher unemployment in light of
government job cuts linked to policy changes from the Department of
Government Efficiency.

Consumer sentiment dropped notably, with the University of
Michigan’s consumer sentiment index reporting a 12% plummet
from February to March across all demographics, marking its third
consecutive month of decline. Expectations of less-stable personal
finances, tariffs and their potential economic impact, higher
unemployment, and persistent inflation all contributed to the
decrease. Although uncertainty played a role in the erosion of
consumer sentiment and other soft data, the hard data show a more
stable picture as we head into the second quarter.

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