March 2025 Market Update
U.S. Equities suffered deepening losses in March as the S&P 500 registered its worst monthly return since December 2022. Uncertainty around tariffs and Federal budget cuts morphed into fears of broadly deteriorating economic growth while emerging cracks in the narrative around Artificial Intelligence-fueled growth drove a sharp sell-off in the same mega-cap tech stocks that led markets higher for most of 2024. All told, the S&P 500 declined 5.6%, and the Technology/Growth-heavy Nasdaq Composite posted a loss of 7.6%. Value stocks broadly held up better than Growth stocks and Magnificent 7 stocks, while International and Emerging Market equities also extended their outperformance against U.S. stocks, which began in February. Importantly, bonds served as an effective hedge against stocks while equity markets sold off (with low-single-digit percentage gains year to date) and provided good ballast to well-diversified portfolios. At the sector level, Utilities, Staples, and Healthcare all outperformed last month as investors leaned into more economically defensive areas of the market. On the other side of the spectrum, Technology and Consumer Discretionary were the two worst performing groups. This is the type of rotation one would expect when investors become more concerned about future economic growth prospects.
The lead stories coming out of March were increasing uncertainty around the trajectory of Trade policy, the scope of proposed Federal Budget cuts, and the impact these policy shifts (and accompanying lack of visibility) may have on economic activity going forward. Mixed messaging on the size and scope of potential tariffs, confusion around whether they are meant as negotiating levers or revenue raisers, as well as the slow and ominous build towards the promised sweeping April 2nd tariff announcements have left market participants, consumers, and corporate executives with little idea of what to expect on trade policy. This concern has been broadly reflected in deteriorating investor, consumer, and business sentiment survey readings.
Investors worry that “soft” data will lead to deteriorating “hard” data and that today’s policy uncertainty could spill over into more cautious spending and investing activity. Recent updates delivered by corporate management teams indicate this is already occurring to some extent. In the past month, multiple Retailers and Airlines reduced their 1st quarter forecasts, homebuilders flagged a weak start to spring selling season, and an economic bellwether, FedEx, lowered its full-year 2025 guidance due to uncertainty in the industrial economy. Management teams from Oil companies and various Manufacturing end markets noted a current lack of visibility is impacting both incoming orders and their capital outlays in survey responses.
For the most part, however, the “hard” data – what consumers and businesses are actually doing rather than how they say they feel – has remained fairly resilient. Although much of this data is admittedly backward-looking, key indicators such as Weekly Retail Sales remained consistent in March, while CEOs from Bank of America, Visa, and Mastercard recently highlighted a stable consumer spending backdrop. The labor market is cooling, but incoming data, at least at the national level, suggest a solid employment backdrop to this point with no observable spike in layoffs (perhaps the reason we have not seen the hard data notch down to the soft data yet).
The widening gap between “hard” and “soft” data will eventually resolve one way or another and we will remain flexible as to the short/intermediate term outcome. The base case likely lies somewhere between the 2.4% GDP growth rate of the 4th quarter and more dire forecasts suggesting we are already in recession. There are enough emerging headwinds and disruptions to suggest growth will slow to some extent. However, in an economy where Consumption represents 70% of GDP, we must also remain open to the possibility that a structurally strong labor market can play a big role in offsetting some growth-negative headwinds.
The current backdrop reminds us that the stock market does not necessarily equal the economy, and that the economy is certainly not the only factor driving the market. Markets often price an aggregate opinion of where the economy and earnings are going nine to twelve months in the future, not where either is necessarily trending today. The growth-positive elements of the Trump agenda – deregulation, infrastructure permitting, and potential tax cuts – will take time to make an impact. Equity markets that discounted a more balanced cadence of growth-positive and growth-negative policies in the weeks immediately following the election are now adjusting to the reality that the latter will precede the former.
Investors are trying to simultaneously contend with the reality that last year’s darlings are posting steep losses so far in 2025. Magnificent 7 stocks collectively are down 25% from their 52-week highs, and these heavily weighted S&P 500 names have been responsible for 96% of the Index’s year-to-date decline, according to FactSet. Remember that this same group represented over 50% of the gain in the Index the past two years. Weakness among these stocks seems primarily attributable to increasing scrutiny of the secular growth narrative driving the AI infrastructure buildout, although historically extreme over-positioning and stretched valuations have also contributed. Recent reports that Microsoft has canceled multiple data center leases have intensified concerns around a possible overbuild of AI infrastructure. This comes after the release of more efficient Chinese AI models (like DeepSeek), which had already begun to cast doubt on how much computing power will ultimately be necessary once AI is trained and deployed across businesses and consumer facing apps.
While Magnificent 7 stocks have underperformed the S&P 500 in 12 of the last 13 weeks and were down 10.4% on average in March, the good news for diversified investors is that the other 493 stocks in the Index are hanging in there, and bonds are helping to cushion equity losses. The Equal-Weight S&P 500 index declined just 3.4% last month and only 0.7% for the year through March. The average stock is outperforming the market cap-weighted index for the first time in a while, and investors are (finally) being rewarded for prudent asset allocation decisions with some protection from recently elevated volatility.
Looking ahead, equity markets will need to clear a few major hurdles in the coming weeks. Certainly, tariff announcement of “Liberation Day” on April 2nd will influence the near-term direction of markets, while the degree to which will depend on whether announcements are more severe or benign than anticipated. Some analysts had hoped this could be a clearing event to move past uncertainty, but investors might consider the news the “end of the beginning” rather than the “beginning of the end” of the trade debate. Without knowing any details as of this writing, we are confident it will not be the last time we need to adjust to new information on tariff policy.
First quarter earnings reporting season also kicks off in April against the high bar of consensus expectations for 10%+ full-year S&P 500 earnings growth. Any commentary around consumer and business spending trends, as well as potentially tempered outlooks in the face of the new trade environment will carry significant weight. This will likely be the best look investors get at actual business conditions and how any policy changes have, and could, impact earnings. A full spring delivery might be too optimistic, but hopefully, investors will start to get more details on tax policy and deregulation efforts – two potential counterweights to any growth drag caused by higher tariffs.
As we continue to navigate an increasingly complex market backdrop, please be assured we are diligently digesting new information in real time to ensure your portfolios remain aligned with your goals. We encourage you to connect with us to discuss your allocation, update your financial plan, or hear more about how recent market developments are impacting your investment strategy.
Additionally, if you know friends or family members who might benefit from our guidance in these challenging times, please feel free to connect them with our team. We stand ready to support you and your loved ones through all your financial decisions.
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