Q1 2025 Market Commentary
The following market commentary provides context for the investment performance of your charitable assets.
From Cambridge Associates, investment advisor
Global stock markets declined slightly in the first quarter, with the MSCI All Country World Index declining -1.3%. The drop was largely driven by a sharp sell-off in U.S. stocks, as investors reacted to new U.S. import tariffs on Canada, China, Mexico, steel, and aluminum. Additional tariffs were announced but with few details, prompting retaliation from affected regions like Canada, China, and the European Union. Growth-focused sectors such as technology, consumer discretionary, and communication services were hit hardest, leading growth stocks to underperform value stocks by the widest margin since 2000. Small-cap stocks also struggled, declining for the third time in the last four quarters and trailing larger companies. On the other hand, global investment-grade bonds rose +2.6%, as concerns about the impact of trade tensions on economic growth drove demand for safer investments.
U.S. stocks fell -4.6%, significantly underperforming other developed markets, which gained +6.2%. This marked the largest gap in performance between U.S. and international developed markets in over 20 years. The decline in U.S. stocks was led by growth-oriented companies, particularly those in sectors tied to the "Magnificent Seven" stocks, as investors worried about high AI investment costs compared to more affordable alternatives like DeepSeek. Excluding these major growth stocks, U.S. equities managed a modest gain of +0.3%. Value-focused and defensive sectors performed better, with value strategies outperforming growth by one of the widest margins on record.
International developed markets outside the U.S. saw strong gains, helped by a weaker U.S. dollar. European stocks led the way, with Europe excluding the UK up +10.7%, supported by positive economic surprises and political developments that improved the outlook for defense spending. The UK also performed well, rising +9.7% on better-than-expected economic data, though inflation remained high compared to other regions. Canada posted a modest gain of +1.1%, as new U.S. tariffs on Canadian goods were met with countermeasures from Canada.
Emerging markets rose +2.9%, driven by a +15.0% surge in Chinese stocks. China’s gains were fueled by excitement over DeepSeek’s AI advancements and government stimulus plans aimed at boosting domestic consumption. Other Asian markets lagged, however, as losses in Taiwan (-12.6%) and India (-3.0%) offset China’s rally. Latin America was the standout performer in emerging markets, gaining +12.7%, with Brazil (+14.0%) and Mexico (+8.6%) leading the way. Brazil benefited from accelerating economic activity, while Mexico advanced despite initial U.S. tariffs, which were later eased for goods compliant with trade agreements.
U.S. bonds performed well, gaining +2.8%. Treasury securities rose +2.9%, outperforming corporate bonds (+2.3%) as interest rates fell and credit spreads widened. Inflation-protected bonds (TIPS) outpaced regular Treasuries, rising 4.2%, as inflation expectations increased and real yields dropped. The Federal Reserve kept interest rates steady during the quarter. The Fed’s economic outlook in March projected 50 bps of additional rate cuts in 2025, while markets centered around 75 bps of cuts but with wide dispersion of expectations.
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