Q1, 2025 ANALYSIS
Published April 3rd, 2025
The first quarter of 2025 witnessed significant volatility across global financial markets, driven by geopolitical tensions, trade disputes, and shifts in economic policies. International equities notably outperformed U.S. stocks by nearly 11 percentage points—a historic divergence. The S&P 500 faced challenges due to trade issues and the unwinding of positions in popular artificial intelligence stocks, compounded by a weakening U.S. dollar. Analysts suggest that if U.S. equities do not recover, foreign investors might redirect their capital to other markets, potentially exacerbating domestic losses. However, anticipated strong earnings growth in U.S. companies for 2025 could enable U.S. stocks to regain their lead by year-end.
The U.S. equity market experienced turbulence, with the S&P 500 declining by 4.6%, marking its worst quarter in nearly three years. The Nasdaq Composite also suffered, dropping 10.4%, its largest quarterly loss since Q2 2022. Significant declines were observed in major technology stocks, including Tesla, which saw a 35.7% decrease in market capitalization. These downturns were primarily attributed to uncertainties surrounding tariffs imposed by President Donald Trump, targeting aluminum, steel, automobiles, and all goods from China. In response, Goldman Sachs reduced its earnings growth forecast for S&P 500 companies to 3%, down from 7%, citing the impact of tariffs, slower economic growth, and rising inflation.
The Eurozone exhibited resilience amid global uncertainties. The HCOB Flash Eurozone Composite PMI Output Index rose to 50.2 in January, indicating modest expansion after several months of contraction. This growth was driven primarily by the services sector, while the manufacturing downturn showed signs of easing. The European Central Bank (ECB) implemented a 25 basis point rate cut in January, reflecting a more favorable inflation outlook and improvements in monetary policy transmission. However, geopolitical tensions, including President Trump's call for NATO allies to increase defense spending and threats of tariffs on European goods, have unsettled policymakers and industries such as automotive manufacturing.
The UK's blue-chip FTSE 100 index surged by 5% in January, buoyed by strong performances in the energy and financial sectors. However, concerns over fiscal stability overshadowed this momentum, with UK government bond yields reaching their highest levels since 1998. The 10-year gilt yield stood at 4.921%. Inflation eased slightly, with the Consumer Prices Index rising 2.5% year-on-year in December, down from 2.6% in November. The Bank of England maintained the benchmark bank rate at 4.75% during its December meeting, emphasizing a cautious approach to monetary policy amid persistent inflation risks.
Japanese equities experienced a strong rally, supported by corporate governance reforms, a weaker yen, and sustained foreign investment. The Nikkei 225 reached multi-decade highs as major exporters benefited from favorable currency movements. The Bank of Japan maintained its accommodative monetary stance but signaled a potential shift in policy later in the year. Inflation remained moderate, and domestic demand showed resilience, bolstering economic optimism.
Asian markets delivered varied performances. China's economy faced challenges due to trade tensions and domestic issues, with the yuan depreciating against the U.S. dollar following the announcement of new tariffs. The Shanghai Composite Index gained modestly, supported by domestic policy measures aimed at stabilizing markets. In contrast, India continued to outperform with strong GDP growth, bolstered by foreign direct investment and robust domestic consumption. South Korea and Taiwan benefited from the global semiconductor boom, while Southeast Asian economies navigated external trade pressures.
Emerging markets faced challenges from a strong U.S. dollar and global interest rate policies, impacting capital flows and currency stability. Latin American equities showed resilience, particularly in Brazil and Mexico, where economic data remained positive. In contrast, geopolitical uncertainties in Eastern Europe and political instability in some African markets created headwinds. Commodity-exporting nations benefited from stable demand, though volatility in oil prices influenced investor sentiment.
Global bond markets remained volatile as investors assessed central bank policies and inflation expectations. U.S. Treasury yields fluctuated amid speculation over the Federal Reserve's next moves, while European bond markets reflected the ECB's cautious approach. Emerging market debt faced pressure from higher yields in developed economies, though select high-yield bonds attracted investor interest. Corporate bonds remained attractive, particularly in sectors with strong earnings growth.
Commodity markets experienced notable movements. Gold prices surged, achieving their best quarter since 1986, driven by trade wars and geopolitical uncertainties. U.S. copper futures also saw significant gains, benefiting from economic uncertainty and proposed copper tariffs. Conversely, oil prices remained relatively subdued, trading within a $10 range between $67 and $77, suggesting global demand is struggling to meet current supply levels.
The digital asset market faced considerable downturns. Bitcoin fell by 11.8%, and Ethereum plunged by 45.6% during the first quarter. These declines were influenced by increased regulatory scrutiny and a shift in investor sentiment amid broader market uncertainties.
In summary, the first quarter of 2025 was marked by significant volatility across global financial markets.