Quarterly Performance Update

March Sell-off Sank U.S. Stocks’ First-Quarter Return

After starting 2025 strong, the S&P 500^® Index ended the quarter with a return of -4.27%. Growing concerns about pending tariffs and their effects on economic growth and inflation weighed on stocks later in the quarter. In March, the index dipped briefly into correction territory and declined nearly 6% for the month.

Sector performance was mixed for the quarter. The energy sector was the strongest, gaining more than 10%, while the consumer discretionary sector was the weakest, dropping nearly 14%. Most size and style indices declined, with large-cap value stocks (Russell 1000^® Value Index) the exception, gaining 2.14%.

Uncertainty Overshadowed Earnings News

The post-election optimism that greeted financial markets in January gradually gave way to severe volatility by quarter-end. Tariff policy uncertainty reigned, weighing on business and consumer confidence and economic growth and inflation outlooks. Ultimately, these concerns overshadowed a strong fourth-quarter earnings season and some positive economic data, including:

• The S&P 500 Index reported a fourth-quarter earnings growth rate of 17.8%, the highest in three years.

• Private sector economic activity expanded in the quarter, largely due to increased services activity. Manufacturing slowed but remained expansionary.

• Job growth surged late in the quarter, with the economy adding 228,000 jobs in March, beating forecasts for 135,000 jobs.

• Headline and core inflation eased more than most economists expected in February, though core inflation remained above the Federal Reserve’s (Fed’s) target.

Fed Left Rates Unchanged but Altered Its Outlook

After cutting interest rates three times in 2024 to a range of 4.25% to 4.5%, the Fed paused in the first quarter. Officials cited still-solid growth, continued labor market strength and moderating inflation as reasons to maintain a wait-and-see approach.

Policymakers also noted that economic uncertainty has increased and indicated they still expect to cut interest rates this year. They downgraded their 2025 growth outlook from 2.1% to 1.7% and lifted their core inflation forecast from 2.5% to 2.7%. They also projected the unemployment rate to end the year at 4.4%, slightly higher than their December forecast of 4.3%.

Non-U.S. Stocks Rallied on European Gains

Non-U.S. developed markets stocks (MSCI World Ex-USA Index) rebounded strongly from a steep fourth-quarter loss, gaining 6.2% in the first quarter. Despite the threat of U.S. tariffs, stocks in Europe rallied, largely on attractive valuations, central bank rate cuts and massive new fiscal spending plans. In particular, Germany loosened its borrowing regulations to ramp up its defense and infrastructure spending, which aided investor sentiment.

U.K. stocks also surged, partly due to robust corporate earnings in the financial and energy sectors. Additionally, an improving economic outlook and attractive valuations versus the U.S. encouraged investors.

Eurozone inflation eased, and the European Central Bank cut interest rates twice during the quarter. The Bank of England lowered interest rates in February but held steady in March amid stubbornly high inflation.

Japan’s Market Increased Slightly

Japanese equities increased slightly but underperformed the broader non-U.S. developed market. Private sector economic activity expanded early in the quarter but fell into contraction mode in March. Manufacturing contracted for the ninth straight month, while the service sector shrank for the first time in five months amid rising concerns about a slowdown in China and U.S. tariff threats.

Emerging Markets Stocks Advanced

Emerging markets (EM) stocks (MSCI Emerging Markets Index) returned 2.93% for the quarter. China accounted for much of the gain, benefiting from improving sentiment toward its artificial intelligence (AI) sector.

Elsewhere, Brazil’s market outperformed on currency strength, and Mexico outperformed as the U.S. postponed some tariffs. An improving price environment for chip producers drove South Korea’s market higher. Conversely, Indonesia, Thailand and Taiwan struggled on growth and tariff concerns.

U.S. Bond Returns Bounced Back

U.S. bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, rebounded from a fourth-quarter loss to return 2.78% in 2025’s first quarter. All index sectors advanced, with mortgage-backed and Treasury securities outperforming the index and investment-grade corporates underperforming.

Expectations for slower growth and future Fed rate cuts helped drive Treasury yields lower over the quarter. The yield on the 10-year Treasury note fell from 4.58% at year-end to 4.21% on March 31. The two-year Treasury yield fell from 4.25% to 3.90%.

The year-over-year headline Consumer Price Index (CPI) moderated in February to 2.8%. Core CPI also eased to 3.1% in February from 3.3% in January. However, annual core Personal Consumption Expenditures, the Fed’s preferred inflation gauge, rose to 2.8% in February from 2.7% in January.

Non-U.S. Bonds Lagged U.S. Bonds

Government bond yields in the U.K. and Europe increased modestly, and global bonds advanced but lagged U.S. bonds. The U.S. dollar stumbled versus other currencies, and Bloomberg’s dollar-hedged global bond index returned 1.2% for the quarter.

EM bond returns also rose for the quarter. Amid U.S. dollar weakness, local currency-denominated EM securities fared the best. U.S. dollar-denominated EM sovereign securities advanced but underperformed EM corporate bonds.