As we closed the first quarter of 2025, investors were met with a stark change in tone from the high-growth environment of the past two years. Rising volatility, shifting trade policies, and renewed concerns about recession created a market defined by uncertainty—and opportunity for those diversified and disciplined.

The market’s early optimism quickly faded by mid-February, as U.S. equities began to retreat in response to heated political rhetoric and the announcement of sweeping new tariffs. The pullback was particularly sharp among small-cap stocks and large-cap growth names, many of which had driven gains in 2023 and 2024.

Despite the rough start, several themes emerged to help ground investors heading into Q2.

The Return of Diversification: What Worked in Q1

In a quarter where U.S. equities struggled, diversification made a notable comeback. While large-cap growth and small caps posted losses, areas like fixed income, international equities, and REITs helped lift balanced portfolios. Falling Treasury yields pushed bond prices higher, providing ballast against equity market declines.

Notably, developed international equities outperformed U.S. counterparts—thanks to a weaker dollar and improved economic outlooks in Europe and parts of Latin America.

Top-Heavy Index: The S&P 500’s Growing Concentration Risk

One of the more critical trends continues to be the growing concentration of the S&P 500. As of Q1 2025, the top 10 companies now account for 35% of the index—up from just 17% in 2015. This shift increases sensitivity to the performance of just a handful of companies, most of which are in the tech sector.

In 2023 and 2024, this helped amplify returns. But in Q1 2025, it contributed to underperformance relative to equal-weighted indexes, highlighting the importance of diversification even within U.S. equities.

The S&P 500 Returns and Volatility – How Tariffs Moved the Market

Q1 ended with two powerful examples of how reactive markets have become to trade policy. On April 3rd, the announcement of new tariffs triggered one of the biggest single-day losses in decades. Less than a week later, news of a 90-day pause on those tariffs sparked the third largest one-day gain in S&P 500 history.

These moves serve as a reminder that even diversified portfolios are vulnerable to sharp sentiment shifts driven by policy headlines.

Looking Ahead: What to Watch in Q2

While Q1 was bumpy, historical precedent suggests cautious optimism. Of the few years with worse starts to the trading calendar, all eventually rebounded—though not all ended the year in positive territory.

As we look to Q2, key areas to watch include:

• The economic impact of tariffs and trade relations

• Fed policy shifts in response to inflation and employment data

• Global opportunities beyond U.S. large-cap equities

• Continued importance of a diversified allocation strategy

Investors would be wise to tune out the noise, stick to a long-term plan, and ensure their portfolios are properly aligned for both risk and opportunity.

Have questions about what this means for your strategy? Connect with your advisor or contact our team directly.