On April 2, 2025, the Trump administration implemented broad new tariff measures, including a 10% baseline tariff on all imports and higher reciprocal tariffs targeting approximately 60 countries with significant trade imbalances or barriers. This represents a substantial shift in U.S. trade policy with potential long-term implications. To help investors navigate these developments, we address six key questions outlining the potential impact.

Stocks fell in the first quarter after two consecutive years of gains exceeding +20%. The year started 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, and we want to take a moment to share our team’s perspective. This post will recap the first quarter, discuss the drivers behind the recent market selloff, and provide an economic update.

Stocks rebounded this week, ending a 3-week losing streak. . Market volatility eased, with the CBOE VIX and bond volatility declining. The market correction felt like capitulation, helping to spark this week’s rebound, but the oversold conditions might be overstated due to the low volatility world we have come from. Ultimately, economic data will decide how long the current market drawdown lasts.

The stock market selloff extended into a third week, with the S&P 500 falling nearly -4% and entering correction territory (-10% below its February peak). Selling pressure remains on mega-cap stocks, with the Nasdaq 100, Growth factor, and Magnificent 7 leading the decline. The Low Volatility, Value, and Equal Weight factors outperformed the S&P 500, while defensive sectors outperformed cyclical ones.

What’s Behind the Market Selloff? First, momentum stocks that led the 2024 rally are now experiencing a sharp reversal. Second, investor exposure to the stock market was high entering 2025. Third, optimism around the Trump administration’s pro-growth policies has given way to concern, with worries that spending cuts and the uncertainty created by tariffs will slow economic growth.

Stocks traded lower in a late-month sell-off as sentiment weakened. The S&P 500’s decline erased most of its post-election gains, which expectations for stronger growth and deregulation under the new administration had driven. Smaller companies underperformed, with the Russell 2000 ending the month more than -10% below its late November peak. Under the surface, the January market rotation continued as last year’s outperformers lagged. The Magnificent 7, a group of mega-cap tech stocks that drove most of 2024’s gains, fell by -8% and dragged down the Nasdaq 100, the Large Cap Growth factor, and the S&P 500.

This week, the S&P 500 fell 1.63% over the shortened week, capped by a Friday sell-off after consumer sentiment disappointed expectations, long-term inflation expectations have been at their highest since 1995, and the South China Morning Post reported a new coronavirus. Treasury yields dropped moderately over the week due to speculation about the timing and pace of interest rate cuts from the Federal Reserve Bank.

In recent years, the Federal Reserve carried out one of the fastest rate-hiking campaigns in history to bring inflation down from a multi-decade high. After holding rates high for over 12 months, the central bank started its current rate-cutting cycle in late 2024, lowering rates by a total of -1% between September and the end of December. Where do things stand now?

This week, the U.S. stock market remained range-bound, with major indexes trading sideways. The S&P 500 gained 0.5%, while smaller companies underperformed, as the Russell 2000 declined by over 1%. After months of sideways movement, the S&P 500 continued to hover around its 50-day moving average. Economic data showed that unemployment fell to 4.0% in January, the lowest since May 2024. Meanwhile, the Consumer Price Index (CPI) rose 0.5% month-over-month, marking the fastest increase since August 2023, with broad-based price gains across categories.

Stocks traded higher to start 2025, but there was a change in market leadership as the rally broadened. Large Cap Value, which underperformed over the past 12 months, outperformed Large Cap Growth by over +2.5% in January. Likewise, the Dow Jones Index traded back toward its all-time high from early December after finishing the year in a downtrend. In contrast, the Growth factor, Nasdaq 100, and Technology sector each underperformed the S&P 500 after propelling the index higher throughout most of 2024.

This week, there was limited dispersion across markets for the second consecutive week despite the volatile response to economic data. The Russell 2000 slightly outperformed the S&P 500, while the Nasdaq and international stocks were flat. Underneath the surface, factor trends saw Momentum, Value, and Equal Weight outperform the S&P 500. Notably, the Magnificent 7 underperformed, dragging down the Growth factor and Tech sector. Sectors experienced significant dispersion. Energy gained +5.8% as oil prices rose, with the Material and Industrial sectors close behind. Bonds ended the week with modest gains despite the round trip in Treasury yields.

The S&P 500 currently trades at over 21 times its next 12-month earnings estimate, a level not seen outside of periods like the late-1990s tech boom and the recent post-COVID recovery, when interest rates were near zero. Why do high valuations matter? History shows that while valuations have a limited impact on short-term returns, they play a critical role in determining long-term performance.