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First Quarter 2025
Scrambled Eggs (and Emotions)
U.S. markets entered the year on a high note after exceptional 25% returns in 2024. Unfortunately, with investors accustomed to the double-digit returns enjoyed in 2023 and 2024, the first quarter of 2025 served a “reality check” with the S&P 500 snapping its five-quarter winning streak.
It all started well as U.S. equities moved higher in January on the strength of Q4 2024 positive corporate earnings reports, strong December non-farm payrolls, and a new pro-business administration in the White House. The positive momentum continued into February with markets marching higher reaching two new all-time highs on speculation of a potential Ukraine peace agreement.
As peace talks dissolved, competition in the Artificial Intelligence (AI) world emerged and the message from the White House turned to stiff tariffs with friendly trading partners, and investor sentiment soured.
The Economy & Earnings - Resilience
Overall, economic indicators remained solid in the first quarter, despite the unsettling news headlines.
At the March 7, 2025 U.S. Monetary Policy Forum in New York, Federal Reserve Chairman Jerome Powell said, “Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place. The labor market is solid, and inflation has moved closer to our 2% longer-run goal.”1
And indeed, the final GDP (Gross Domestic Product) figure, a measure of economic output, for the fourth quarter of 2024 was 2.4%, following 3.1% for the third quarter 2024. This level of economic output was very promising as the first quarter began, though in the March 19, 2025 meeting of the FOMC, the participants changed their 2025 median estimate from 2.1% to 1.7%.2 Interest rates remained unchanged.
Unemployment ticked up modestly in the quarter to 4.2% from 4%. The unemployment rate has remained in a narrow range between 4% and 4.2% since March 2024. Job growth slowed in January and February, but greatly exceeded March expectations, coming in with 228,000 new jobs.
Inflation moved closer to the Fed’s 2% target, but the January Headline CPI (Consumer Price Index) rose 0.5% month-over-month from December. Some areas of the economy, like shelter and services, continued to experience “sticky” inflation. It is no secret that the price of eggs increased 97% from February 2024 to February 2025.3 “Eggflation” pushed the cost of a dozen eggs to $13.00 in some parts of the country. Although this is mostly due to a supply shortage, the cost of eggs is being scrambled into other areas of food industry.
S&P 500 earnings reported in the first quarter grew 17.1% year-over-year in Q4 2024, exceeding analysts’ estimates of 9.5% and a staggering 40% for 2024, mostly propelled by the “Magnificent Seven” stocks (or “Mag 7” for short). Despite the threat of tariffs, earnings revisions remained within historical ranges for the quarter ahead.
Equities & Alternatives - A change in the leader board
International equities outpaced domestic stocks in the first quarter, recouping much of fourth quarter declines, and mega-cap growth stocks ceded leadership after driving returns in 2024.
In the U.S., the S&P 500 declined 4.3 % in Q1 which reflected investors’ growing concerns around the impact of new trade policies on U.S. companies and the economy. Meanwhile, across the globe, developed international equities rallied 7.0%. The Hong Kong Index surged 15.3%, fueled by strong performances in the tech sector, primarily linked to the company known as DeepSeek, whose AI technology looked to challenge the U.S.’s leading position in the AI race.
The Magnificent Seven tech giants lost nearly $2 trillion in market value, outpaced by Chinese tech firms and European defense companies (Reuters). With concerns over less U.S. defense assistance abroad, higher defense spending in Germany pushed the German index up 11.3%. International companies outperformed the U.S. by 1,100 basis points - the largest outperformance by International over U.S. since 1989. International companies have not suddenly become fundamentally superior to U.S. companies, but coming into the new year, offered compelling valuations relative to their U.S. counterparts. A 40% valuation discount to U.S. stretched S&P 500 valuations and the rise in policy uncertainty invited investors to take a closer look at these opportunities abroad.
Domestically, large cap companies remain better positioned to weather a slower domestic economy than smaller companies, which declined 9.5% in the first quarter.
Within the S&P 500, 2024’s three top performing sectors, Technology, Communications and Consumer Discretionary (which house the Magnificent Seven stocks) experienced a reversal of fortune, lagging behind the other eight sectors this quarter. Energy, a long-time laggard turned leader in Q1, topped the list with a 10.0% gain. In total, seven of the eleven sectors closed in positive territory in the first quarter.
Of note, the S&P 500 excluding the Mag 7 companies, actually had a modest positive return of 0.4% for the quarter, illustrating the continuing rotation out of high growth companies into more valued oriented corners of the market.
Source: Factset - S&P 500 GIC Sector Total Returns as of March 31, 2025.
Gold, a precious metal which falls into the Alternative Asset class, has been enjoying an almost steady rise in price since 2022, appreciating 70% and moving from approximately $1,700 an ounce to an all time high of $3,128 on March 31, 2025. Investors see gold as a sanctuary in times of volatility. Gold hit 18 new price highs in the first quarter and closed the quarter up 14.75%.
Fixed Income - Bonds as a Backstop
The traditional relationship between stocks and bonds re-emerged in the first quarter. Yields on the 10-year Treasury note dropped to 4.23% at the end of the quarter, after peaking at 4.79% in early January. Bond yields move in the opposite direction of prices, as funds shifted to higher ground, the price of Treasuries moved higher. The Bloomberg U.S. Aggregate Index, comprised of investment grade U.S. Corporate Bonds and U.S. Government Securities, returned 2.78% for the quarter, playing the role of a “hedge” against volatility.
1Q 2025 asset class returns
Total returns
Source: Bloomberg, FactSet, MSCI, Russell, Standard & Poor’s, J.P. Morgan Asset Management.
Looking Ahead
Last week’s market action revealed how sensitized markets have become to even a single data point.
The impact of tariff announcements and the final tariff plan remains to be seen, and the laundry list of concerns continues to grow, including reaccelerating inflation, decelerating consumer spending, weakening consumer confidence, a potential decline in overall business activity, and geopolitical tensions. In contrast, the actual returns for the first quarter in a diversified portfolio were much less impacted than it “felt.” Whether you are building your nest egg or nurturing your retirement portfolio, in these times of stress it is important to adhere to objectives and long-term goals. The U.S. economy is resilient and 340 million people are contributing to ongoing commerce on a daily basis.
Uncertainty impacts market conditions far more often than actual disasters. “With emotions running high, be reminded that over the last 70 years, we have experienced wars, political turmoil, financial crises, health crises, humanitarian crises, 11 bear markets, 13 recessions, all the while the U.S. stock market has returned an approximate 8% average annualized return. A statistic that hopefully reinforces staying invested, despite the unnerving political and macro environment.” (Callie Cox 2.21.25)
At Cape Cod 5, we appreciate the confidence placed in us to monitor and protect your assets during uncertain times. We will continue to keep a vigilant and watchful eye over your nest egg and if you ever have questions or concerns, please reach out to us. As always, we’re here to help.
Kimberly K. Williams
Senior Investment Officer
On behalf of the Cape Cod 5 Trust and Asset Management Investment Team
Michael S. Kiceluk, CFA, Chief Investment Officer
Rachael Aiken, CFP®, Director of Investments
Brad C. Francis, CFA, Director of Research
Jonathan J. Kelly, CFP®, CPA, Senior Investment Officer, Manager, Financial Planning
Nancy Taylor, CFA, CAIA®, Senior Investment Officer
Robert D. Umbro, Senior Investment Officer
Benjamin M. Wigren, Senior Investment Officer
Craig J. Oliveira, CFA, Investment Officer
Jack Dailey, Investment Analyst
Alecia N. Wright, Investment Analyst
1 "Speeches of Federal Reserve Officials: Economic Outlook." The Federal Reserve, March 7, 2025. https://www.federalreserve.gov/newsevents/speeches.htm
2 "Summary of Economic Projections." The Federal Reserve, March 19, 2025. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250319.pdf
3 "$13 a dozen: See how eggflation has left consumers scrambling nationwide." USA Today, March 31, 2025. https://www.usatoday.com/story/money/2025/03/31/national-egg-costs-march-2025/82640243007/
These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.
