Fear and uncertainty are two prevailing themes that emerged as we closed out the first few months of the year.

After a strong start to the year that saw the S&P 500 hit an all-time high in February, markets took a breather as policy uncertainty emerged.

And as winter turned to spring, so did investor sentiment. Concerns about rising policy uncertainty in Washington weighed on the market, and the S&P 500 ended the quarter on a lower footing.

While it’s natural to feel uneasy during a market pullback, it’s important to keep perspective. Markets go through cycles, with some driven by optimism, and others by caution. In this update, we’ll recap the first quarter, explain what’s behind the recent selloff, and share our view on where the economy may be headed.

There are a lot of moving pieces in play, and that can make headlines feel overwhelming. But with a solid financial plan in place, these moments of market stress can become easier to navigate. Our goal with this update is to help you focus on what matters most: making informed decisions that support your long-term financial wellbeing.

Stocks Trade Lower as Valuations Moderate

One of the biggest developments in the first quarter was a reset in stock valuations. What this means is that investors carefully evaluated how much they were willing to pay for a dollar of a stock’s earnings.

And while corporate earnings expectations held relatively steady, investors became more cautious, especially as policy uncertainty increased. As a result, stocks fell and not because profits disappeared, but because investors were less willing to pay top dollar for those expected profits.

Figure 1 provides helpful context. The dashed blue line shows Wall Street’s 12-month earnings forecast for S&P 500 companies. In contrast, the navy shading illustrates the market’s price-to-earnings (P/E) ratio, or how much investors are willing to pay for each dollar of earnings.

Historically, earnings estimates are less volatile than investor sentiment, and the chart shows that pattern continuing this quarter.

And so, during the first few weeks of 2025, optimism prevailed. But as headlines around tariffs and shifting policy agendas emerged, that optimism gave way to caution. Investors recalibrated their expectations, and valuations declined, falling from over 22x earnings to around 20x.

Now, while that may seem like a small adjustment, it had an outsized impact on stock performance. In short, markets got cheaper, even though company profits stayed largely intact.

Another theme that emerged this quarter was centered around company size. Last year, the so-called “Magnificent 7” of Nvidia, Microsoft, Alphabet, Amazon, Tesla, Apple, and Meta, soared, lifting the broader S&P 500 by +23%.

This year, those same companies are pulling the index lower, down about -15% as a group. Meanwhile, smaller companies within the index are holding up better. For example, the equal-weighted S&P 500, which gives every company the same influence regardless of size, is down just -1%.

What this means for you: The market’s recent dip has more to do with investor mood than economic fundamentals for the time being. This view could change should policy missteps lead to a broader economic decline. Nevertheless, during this period of uncertainty, it’s essential to remember that your portfolio is built to weather these kinds of shifts, and to take advantage of opportunities when they arise.

Rising Policy Uncertainty is Impacting Sentiment

So, why exactly is policy uncertainty so important? Well, as households and business become less certain about the future, they tend to spend and invest less as well. And one of the main drivers behind this quarter’s market pullback was a shift in sentiment.

As new policies emerged from Washington, focused on trade, tariffs, and government spending, investors, business leaders, and consumers began to show signs of caution. While these developments are still evolving, they’ve introduced a level of uncertainty that markets typically dislike.

Figure 2 tracks three key sentiment indicators that help us understand how people are feeling about the economy:

• Consumer Sentiment (top clip): This comes from the University of Michigan’s well-known survey. After recovering steadily from the lows of the pandemic, consumer confidence dipped again in early 2025. Higher prices, policy shifts, and election-year headlines have likely all contributed to renewed anxiety. Since consumer spending drives nearly 70% of the U.S. economy, a dip in confidence can have ripple effects.
• CEO Confidence (middle clip): Business leaders are also showing signs of concern. The Conference Board’s index fell to its lowest level since 2011. CEOs are facing tough decisions amid uncertainty over tariffs, global trade dynamics, and potential changes to labor and immigration policy. When CEOs feel cautious, they tend to delay hiring, investing, or expanding, which can slow broader economic growth.
• Market Volatility (bottom clip): Measured by the CBOE Volatility Index (VIX), market turbulence picked up noticeably after mid-February. Some volatility is a normal part of investing, but the recent spike reflects investors trying to price in an unclear policy outlook. Until there’s more clarity, we may continue to see wider swings in the market.

Sentiment doesn’t always match reality, but it can influence behavior. People might spend less, hire less, or invest less simply because they feel uncertain. That’s why we monitor these data points.

Ultimately, they can help us anticipate how market participants might behave in the months ahead. While sentiment has softened, the economic data has not yet caught up, suggesting a possible lag between perception and actual economic activity.

So then, what sentiment data are telling us now is that there’s a potential that negative sentiment could feed into a self-perpetuating cycle of slower economic growth, slower earnings growth which could lead to more market volatility in the weeks and months ahead.

An Update on the U.S. Economy

Now, it’s easy to assume that when markets fall, the economy must be weakening too, but that’s not always the case. The stock market can be considered a voting, or discounting machine. It’s a forward-looking mechanism that’s trying to price in expectations about the future into today’s market.

So then, prices tend to move up and down to expectations, not just present conditions. And while market sentiment shifted this quarter due to policy uncertainty, the latest economic data tells a more nuanced story.

Figure 3 illustrates four key economic indicators that help us evaluate the health of the U.S. economy:

• Unemployment Rate (top clip): Despite headlines, the labor market remains solid. After ticking up in 2023 and early 2024, unemployment has moved lower in recent months as job growth has picked up. A strong job market means continued income for households and stable consumer spending which is the backbone of the economy.
• Retail Sales Growth (second clip): Consumer spending grew strongly in 2023, buoyed by higher wages and leftover savings from the pandemic. In 2024 and early 2025, growth has slowed, but not reversed. This signals that households are still spending, just more cautiously, which is a natural adjustment as interest rates remain elevated.
• Housing Starts (third clip): The housing sector has cooled in recent years due to high mortgage rates and affordability challenges. Builders are also facing added uncertainty as potential tariffs could increase material costs, and immigration policies may impact labor availability. Still, new home construction remains above pre-pandemic levels, a sign of resilience despite the headwinds.
• Industrial Production (fourth clip): This measure of economic output from factories, utilities, and mines declined through much of 2023 and 2024. Recently, however, it has begun to recover. Improved clarity on interest rate cuts and post-election policy direction ahead of tariff decisions could have contributed to renewed business investment.

The bottom line: So are we headed for an economic collapse? Well, it depends. Presently, the data suggests that the economy is still growing, but at a slower pace. The labor market is healthy, consumers are adjusting rather than retreating, and manufacturing is showing early signs of strength.

With that said, the effects of the Trade War are likely not yet fully reflected in the economic data. There’s a potential that, a policy misstep by the current administration could create conditions (weakening sentiment, lower spending and investment) that precipitate an economic slowdown.

That’s why these data points are worth monitoring closely. For now, we’ll continue to monitor the risks, particularly around policy impacts, as the overall data does not reflect that we’re currently in a recession.

Overall, it’s uncertain whether the short-term headlines will evolve into an economic decline. That’s why we believe it’s important to stay focused on long-term trends and avoid letting momentary shifts dictate your financial strategy.

Equity Market Recap: Looking Beyond the Index

So then, what does this valuation, sentiment and economic backdrop mean for stocks as we move through the second quarter?

Well, most of the stock market’s decline this quarter happened after the S&P 500 set a new all-time high on February 19th. And what’s crucial to understand is that this pullback wasn’t spread evenly across the market.

That’s because a handful of the largest, most recognizable companies bore the brunt of the losses, and as we pointed out earlier, their size meant they pulled the overall index down with them.

The “Growth” style of investing, which includes many of the big technology names that led in recent years, declined -10% in Q1. The Nasdaq 100, a tech-heavy index that includes the “Magnificent 7” fell -8%. But underneath the surface, the picture looked very different.

In fact, 9 of the 11 sectors in the S&P 500 outperformed the index. Seven of those sectors actually posted positive returns, while two were flat. Only two sectors, Technology and Consumer Discretionary, saw notable losses, and both are heavily influenced by the Magnificent 7 through the end of March.

In other words, there wasn’t a broad-based selloff per se in the first quarter. Rather, it was a concentrated recalibration of the companies that led the market higher in 2023 and 2024. Indeed, many of last year’s lagging sectors are this year’s leaders, showing how market leadership can rotate quickly.

International stocks also stood out in Q1. For example, the MSCI EAFE Index, which tracks developed markets outside the U.S., gained +8%, and posted one of its strongest quarters of outperformance since 2000.

Europe, in particular, saw strength as governments unveiled new spending initiatives. And the MSCI Emerging Markets Index also gained +4.5%, outpacing the S&P 500 by nearly +9%.

Market headlines often focus on the S&P 500, but that’s just one slice of a broader, globally diversified portfolio. Last quarter’s performance reminds us why we diversify: when one area struggles, others may thrive. That balance helps smooth returns and reduce risk over time.

Credit Market Recap: Bonds Trade Higher in Q1

While stocks declined in the first quarter, the bond market offered a measure of stability. In fact, bonds did what they’re often designed to do: provide diversification and help cushion portfolios during periods of market stress.

There were two main themes in the bond market this quarter: a drop in U.S. Treasury yields and a widening in credit spreads.

First, let’s talk about yields. The 10-year Treasury yield fell from around 4.80% in mid-January to 4.15% by early March. This decline reflected a shift in investor behavior as concerns over policy uncertainty, potential tariffs, and a slowing economy pushed investors to seek safety in longer-term government bonds.

When demand for these bonds rises, their prices go up and their yields fall.

As bond prices rose, investors benefited, especially those with Treasury exposure. This helped offset some of the losses from the stock market and reinforced the value of owning high-quality bonds as part of a diversified strategy.

As we enter the second quarter, this theme is being challenged as some large investors question holding Treasuries. However, it’s crucial to note that the Treasury market still remains the largest and most liquid bond market globally, and is backed by the Federal Reserve.

With that said, the second major and notable bond market theme in the first quarter was credit spread expansion. Now, this theme is something to watch as it’s typically reflective of market or economic uncertainties.

That’s because credit spreads measure the extra yield investors demand to lend money to corporations, compared to lending to the U.S. government. Wider spreads mean investors are more cautious because they see greater risk in lending to companies, especially those firms with lower credit ratings.

Figure 4 charts the high-yield credit spread going back to 1997. And after narrowing in late 2024, when the Federal Reserve began cutting rates, spreads began to widen again in Q1. The yellow circle highlights this recent shift. This suggests that investors are now more sensitive to risks around tariffs, slower growth, and policy change.

That said, spreads remain low by historical standards, which likely means that while caution has increased, the bond market isn’t flashing warning signs of financial stress. Indeed, by some measures, companies still have access to capital, and credit markets remain functional barring external shocks from further policy mis-steps.

Overall, bonds remain an important stabilizer in your portfolio regardless of what you’re reading in the headlines. Even as uncertainty rises, high-quality bonds continue to provide ballast during turbulent periods. And while credit spreads have widened slightly, the broader financial system remains sound for now, which is another reason to stay grounded and focused on your long-term plan.

2025 Outlook: Maintaining a Long-Term View

Periods of market volatility can feel unsettling, especially when headlines are filled with ambiguity. But these periods are not only normal, they’re expected as part of a typical economic and market cycle.

In fact, they’re part of what makes long-term investing work.

How so?

Well, pullbacks help reset expectations, cool overheated areas of the market, and set the stage for future gains.

Figure 5 puts this into perspective. It shows nearly a century of S&P 500 data and highlights a simple truth: market pullbacks happen almost every year. Since 1928, the index has experienced a decline of at least -5% in 91 out of 98 calendar years. The median intra-year drop is -13%. This year’s volatility isn’t unusual, it follows a well-established pattern.

In fact, despite wars, recessions, inflation spikes, financial crises, and global pandemics, the market has consistently recovered and moved higher over time. That upward trajectory has been fueled by economic growth, innovation, and corporate profitability and not just investor optimism.

Here’s the key takeaway: volatility is the price of admission for long-term growth.

And trying to avoid short-term swings by timing your way into and out of the market often means missing the eventual rebound. So then, by staying fully invested, no matter what the market is doing, you give your portfolio the chance to participate in compounding returns over time.

Overall, my job is to help you stay focused on what you can control, including your goals, your risk tolerance, your long-term plan. When the headlines shift, your strategy doesn’t have to because we’ve built a plan designed to weather times like these, and we’re here to help you stick with it.

Whether markets are rising or falling, the most powerful tool we have is perspective. And right now, perspective reminds us that temporary setbacks are a normal part of progress, and that long-term success comes not from reacting to every twist and turn, but from remaining committed to a thoughtful plan.