In the first quarter of 2025, global financial markets encountered a turbulent period marked by a sharp reversal in investor sentiment and the reemergence of trade war dynamics as a defining market catalyst. After beginning the year on relatively stable footing, U.S. equity markets corrected as the Trump administration unveiled a sweeping and surprisingly aggressive tariff regime—shifting trade policy from a perceived negotiation tactic to what the market believed to be a central structural theme. The S&P 500 declined over 10% from its February highs by mid-March, entering official correction territory. This marked the index’s largest quarterly loss since Q3 2022, despite continued strength in the labor market and easing inflation pressures earlier in the year.
Small-cap stocks bore the brunt of the selloff. The Russel 200 entered bear market territory by the end of March, falling more than 20% from its late-2024 highs. The index, previously viewed as a beneficiary of reshoring and deregulation trends, suffered disproportionately amid rising input costs and waning investor risk appetite. The S&P MidCap 400 was also down over 15% year-to-date as of March 31, underscoring broader concerns that tariff-driven headwinds were beginning to weigh on the real economy.
Economic data reflected a mixed backdrop. The March ISM Manufacturing Index fell back into contraction territory, with new orders hitting a 22-month low and the prices paid component surging to the highest level since mid-2022. The services sector also showed signs of deceleration: the ISM Services Index slipped to 50.8 from 53.5, with softness in employment and cost pressures linked directly to tariff activity. Still, the labor market remained a relative bright spot. The March nonfarm payrolls report posted a 228,000 gain—well above consensus—though the unemployment rate ticked up to 4.2%. Wage growth moderated to 3.8% year-over-year. ADP private payrolls also exceeded expectations, with job gains broad-based across sectors such as health care, transport, and professional services. However, the Challenger job cuts report showed Q1 layoffs at their highest level since the 2008–2009 financial crisis, led by federal and corporate efficiency programs. Continuing jobless claims also rose to a multi-year high.
Federal Reserve Chair Jerome Powell struck a cautious tone during a late-March address, highlighting that the tariff announcements were “significantly larger than expected” and likely to contribute to near-term inflationary pressures and slower growth. He emphasized the Fed’s flexibility but offered no firm guidance on rate adjustments, reinforcing a more data-dependent stance.
Markets digested these developments in relatively orderly fashion—until the early days of April, when the administration enacted the “Liberation Day” tariff package on April 2. These sweeping measures included a 10% baseline tariff on all imports and a 34% tariff on Chinese goods, raising effective levies on Chinese imports to over 50%. China responded with a symmetrical 34% tariff on U.S. goods and new export restrictions, including on rare earths, while launching regulatory probes into sensitive U.S. sectors.
The initial market reaction was sharp and historic. On April 3, the S&P 500 fell 4.8%—its worst single-day performance since June 2020—followed by another 6% decline the next day, bringing the two-day loss to over 10%. The Nasdaq Composite and Russell 2000 both entered bear market territory, while the Dow Jones and S&P 500 deepened their corrections. Breadth collapsed: 97% of S&P 500 constituents traded lower. The CBOE Volatility Index surged to 45, and RSI readings across indices fell below 25, signaling deeply oversold conditions.
But just as swiftly as tensions escalated, sentiment turned decisively. On April 8, the White House announced a 90-day suspension of newly announced tariffs on all countries except China—a clear signal that the broader tariff framework was more negotiable than previously feared. The market’s reaction was immediate and emphatic: the Nasdaq Composite surged over 12%, one of its largest single-day gains on record, while the S&P 500 jumped 6.1% and the Russell 2000 advanced 8.4%. Volatility compressed sharply, and oversold conditions across major indices set the stage for a broad-based rebound.
Just a few days later, the administration followed up by rolling back tariffs on smartphones and computers, citing concerns over consumer prices and supply chain disruptions.
In our view, this sequence of events will likely be remembered as one of the highest-stakes trade negotiation maneuvers in recent memory. With over 70 countries now in active discussions to renegotiate trade terms with the U.S., and with both the U.S. and China deeply incentivized to stabilize relations, we believe there is a high likelihood that cooler heads will prevail.
With respect to the investment landscape, the recent selloff created compelling valuation resets. The Russell 2000 now trades at the lower end of its 20-year range, the S&P MidCap 400 sits at just 14x forward earnings (below its historical median), and even the equal-weighted S&P 500 has re-rated closer to long- term norms. While headline indices such as the Nasdaq 100 remain relatively elevated, they too have come off peak multiples, allowing for more balanced forward expectations.
