March Recap: The Market Navigates Economic and Policy Uncertainty

Monthly Market Summary

Stocks fell in the first quarter after two consecutive years of gains exceeding +20%. The year started off strong, with the S&P 500 reaching a new all-time high in mid-February. However, sentiment shifted late in February amid rising policy uncertainty in Washington, and the S&P 500 ended the quarter down. There are many moving pieces in markets today.

Stocks Trade Lower as Valuations Moderate

The big development in Q1 was falling stock market valuations, as rising policy uncertainty weighed on investor sentiment. Company size impacted returns during the quarter, as market leadership shifted and last year’s top performers lost momentum. Last year, the Magnificent 7, a group of leading tech stocks that includes Nvidia, Microsoft, Alphabet, Amazon, Tesla, Apple, and Meta, delivered an impressive +63% return. The group’s strength lifted the broader market, with the S&P 500 gaining +23%. In contrast, the equal-weight S&P 500, which gives all companies the same weight regardless of size, gained only +11%. This year, the dynamic has flipped. Instead of lifting the market, the biggest stocks are now dragging it down. The Magnificent 7 has declined -15% year-to-date, while the equal-weight S&P 500 is down only -1%. The takeaway: smaller companies held up better during the selloff.

Equity Market Recap – Looking Beyond the Index

Most of the stock market decline occurred in the second half of the quarter, after the S&P 500 set a new all-time high on February 19^th. As mentioned earlier, a small group of mega-cap stocks drove the selloff, and their size and weight within broad stock market indices impacted performance trends. The Growth factor, which holds many of these high-profile mega- cap stocks, returned -10% in Q1. Similarly, the Nasdaq 100, an index of leading technology companies that include the Magnificent 7, returned -8%.

Sector returns highlight the concentrated nature of the selloff. Nine of the eleven S&P 500 sectors outperformed the broad index to start the year. Seven of those sectors posted gains, while the other two were flat. This is a sharp contrast to last year, when a handful of sectors powered the S&P 500’s gains. Technology and Consumer Discretionary, two of last year’s top performers, are the two worst-performing sectors this year. It’s not a coincidence that these sectors are the most exposed to the Magnificent 7, which has weighed on their returns just like the broader S&P 500. In contrast, sectors that underperformed in 2024 are the top-performing sectors this year. While the S&P 500 is down by -4.3%, the average stock within the index is down -1%.

International stocks outperformed U.S. stocks in Q1, posting one of its biggest quarters of outperformance since 2000. The underperformance of U.S. mega-cap tech stocks contributed to international’s outperformance. Outside the U.S., the MSCI EAFE Index of developed market stocks gained +8% in Q1. Much of that strength came from Europe, where investor sentiment improved as governments unveiled plans to increase spending. This triggered a rotation out of U.S. stocks and into Europe in anticipation of increased government spending leading to stronger economic growth. Meanwhile, the MSCI Emerging Index gained +4.5% in Q1, underperforming the developed index but outperforming the S&P 500 by nearly +9%.

Credit Market Recap – Bonds Trade Higher in Q1

There were two notable themes in the bond market in Q1: falling U.S. Treasury bond yields and wider credit spreads. The 10-year Treasury yield fell from a peak of around 4.80% in mid-January to 4.15% in early March. It was a reversal from Q4, when the 10-year yield rose more than +0.75% due to renewed inflation concerns. Several factors contributed to the Q1 reversal, including rising policy uncertainty, the potential for tariffs, and concerns about slower economic growth. The combination prompted investors to move money into longer-maturity government bonds, which are viewed as safe havens. Bond prices rise as yields decline, and Treasury bonds provided diversification benefits in Q1, offsetting a portion of the stock market decline.

Another major theme was credit spread expansion. Credit spreads measure the difference in yield between high-yield corporate bonds and safer government bonds, such as U.S. Treasuries. Spread levels can serve as a real-time gauge of market sentiment, showing how easy or expensive it is for companies to borrow money. A narrower spread signals that investors view credit risk as low, while a wider spread signals higher perceived default risk.

Figure 1 graphs the high-yield credit spread since 1997. The high-yield spread narrowed in late 2024 as the Federal Reserve cut interest rates, reaching levels last seen in 2007. However, the yellow circle shows credit spreads widened in Q1. The increase indicates investors are becoming more cautious, with the potential for tariffs and slower economic growth leading to higher credit risk.

Despite the recent rise, the chart shows credit spreads remain low by historical standards. Compared to past periods of market stress, today’s spread levels suggest financial conditions are still relatively stable, a reflection of the U.S. economy’s overall strength. While investors are concerned about policy uncertainty and the potential for slower growth, the market is not signaling financial distress. However, if spreads continue to widen, it could signal tighter financial conditions and raise concerns about potential defaults. The market will be watching spreads closely.

2025 Outlook – Maintaining a Long-Term View

Market volatility can be unsettling, but it’s a normal part of investing. Periods of enthusiasm often lead to recalibration. It’s natural to feel uncertain, but history shows that staying invested through volatility and maintaining a longer-term perspective is the prudent approach.

Figure 2 puts the Q1 market volatility and selloff into perspective. It uses almost a century of S&P 500 price data to show that market pullbacks like this year are not just common—they’re a healthy and recurring part of investing. The chart graphs annual drawdowns, or the largest peak-to-trough decline within each calendar year. The bars show the S&P 500 experiences a pullback nearly every year, with a median intra-year drawdown of -13%. Since 1928, the S&P 500 has experienced a drawdown of -5% or more in 91 out of 98 calendar years, including 2025.

The chart highlights a fundamental reality of investing: market corrections are a normal part of the cycle. These periods can be uncomfortable, but they serve the important functions of resetting valuations and curbing speculative excess. Without occasional declines, markets could become dangerously overextended, increasing the risk of more severe and extended downturns.

Despite these frequent and sometimes severe drawdowns, the S&P 500 has delivered strong returns over nearly a century. This is despite wars, recessions, inflation spikes, financial crises, and a global pandemic. The upward trajectory is driven by economic growth, innovation, and corporate earnings growth. The key takeaway for investors: volatility isn’t a sign that something is broken—it’s the price of admission to investing. Staying invested through ups and downs has consistently been one of the most effective strategies for building wealth over time. Market declines can feel unsettling in the moment, but history shows the powerful effect of compounding returns over time.

The Markets Last Quarter Commentary for 1Q2025

Equities

The S&P returned -4.3% in the first quarter of 2025. After starting the year strong and notching an all-time-high on the 19th of February, the S&P 500 fell into “correction” territory (a drop of 10% from recent peak) in just 17 trading days. Markets were worried that uncertainties, and potential inflation, due to tariffs, and the administration’s heavy-handed job and spending cuts would weigh on economic growth, and in turn, on corporate earnings. Wall street analysts began reducing their economic growth forecasts amid fears that weak consumer and business sentiment would eventually manifest in actual reductions in consumer spending and business investment. Economic data showed a plunge in consumer sentiment and a rise in long-term inflation expectations; with inflation remaining stubborn and potentially headed higher, markets are concerned that the Federal Reserve may not be able to lower interest rates to support a slowing economy. A key drag on index performance were returns from the largest tech stocks which have driven the bulk of market returns over the past two years based on the potential of AI: the ‘Magnificent 7’ stocks were down 16% in the quarter amid concerns that a cheap AI model from Chinese start-up DeepSeek could make their high-flying valuations hard to justify. Within the S&P 500, energy (+3.9%) and utilities (+0.3%) were the only sectors with positive performance; particularly hard hit were consumer discretionary (-8.9%), technology (-8.8%) and communication services (-8.3%) stocks. EAFE markets returned 6.9% in Europe (+10.5%) and the U.K. (+6.4%) leading; markets expect increased government spending and investment in Europe amid the new leadership in Germany and change in U.S. foreign policy towards Europe. EM returned 2.9% led by China (+15.0%) amid optimism around AI and technology though the potential impacts of tariffs dragged on returns across geographies late in March.

From a valuation perspective, U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.3. The NASDAQ is at +0.5. For the next 12 months, EPS growth for S&P 500 is expected to be 10.1% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 18.0% (vs. 10.7% annualized over the last 20 years). All U.S. indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap) and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-US Developed Market Equities) and MSCI EM (EM Equities) are inline.

Fixed Income

Investment grade fixed income had positive returns for the quarter as rates fell sharply across the curve and offset widening spreads. For the quarter, municipals returned +0.3%, the Bloomberg Aggregate Index returned 2.8% and investment grade corporates returned 2.3%. High yield bonds returned +1.0% even as spreads widened 60bps, while leveraged loans returned +0.5%. Emerging Market debt returned +1.6% as the dollar fell 3.9%.

Rates

Rates fell across the curve as markets responded to the slowing economy, sticky inflation, deteriorating consumer sentiment and geopolitical uncertainty. The recession-watch 3M-10Y spread compressed 34bps and has gone negative again at -10. The 2Y-10Y spread compressed 1bp to +32. Rates rose sharply in other developed markets, especially in Europe and the U.K. where markets expect increased deficits from higher government spending. The spread between Italian and German 10Y bonds compressed 9bps to 1.13%. 5-year breakeven inflation expectations rose 24bps and now sit at 2.63% (low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 3bps and now sit at 2.37% (recent low of 2.03% on Sept 10); the 10Y real yield fell 39bps to 1.84%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.7% vs. the Fed’s guidance of 3.75%- 4.00%.

Currencies/Commodities

The dollar index fell 3.9% in the quarter and U.S. dollar weakened again most major world currencies. The commodities complex gained 4.9% as energy prices rose 4.8% in the quarter. Brent oil was roughly unchanged at $75/bbl. US natural gas prices rose 13.4% while European natural gas prices fell 13.2%, both related mainly due to weather.

Market monitors

Volatility rose for equities (VIX = 22) and for bonds (MOVE = 101). Market sentiment fell sharply from +4 to -25 as investors remain concerned about the economic outlook.

Source: Morningstar.

Disclosures

Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere