What Happened in the First Quarter of 2025

Presented by John Fitzgerald

Colorful background with Q1 in the front, representing the end of the first quarter of 2025. Behind it is a simple bar and line chart.

The first quarter of 2025 was bumpy for investors. After a strong finish to 2024, markets started the year on a high note—continuing a rally that began after the election. From Election Day through February 19, 2025, the S&P 500 experienced a 5.7 percent rally, including a 3.9 percent increase to start the year.

That momentum didn’t last, however. Concerns about potential new tariffs and uncertainty around their impact on consumers rattled investor confidence. As questions arose about how these policies might affect economic growth, the market pulled back. The S&P 500 dropped 10 percent from its high, ending the quarter down 4.27 percent, with most of the decline happening in March.

Why Did the Market Drop?

A large part of the downturn came from just a handful of stocks. You may have heard of the so-called Magnificent Seven (i.e., Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), which delivered major gains over the past two years. At the end of 2024, they made up more than one-third of the S&P 500.

In early 2025, these same stocks fell 14.8 percent, and the overall index declined with them. But there is more to look at.

Although those seven stocks are clearly an important part of the market, their decline is not representative of the broader market, which held up relatively well. The 493 other stocks in the S&P 500 were up 0.4 percent for the year, and a well-diversified portfolio of 60 percent stocks and 40 percent bonds experienced a slight decline of less than 0.5 percent.* In other words, many investors experienced less volatility than the headlines suggest.

Seven of the eleven major sectors in the stock market have had positive returns this year. International stocks outperformed U.S. stocks due to increased spending on defense and infrastructure in Europe. Bonds have also fared well year-to-date, with returns up 2.78 percent.

What’s Next?

Now that the first quarter is in the books, what will the rest of the year look like? If we had a crystal ball, it would certainly make everyone’s job easier. History gives us some perspective. The correction of 10 percent we just experienced is a normal part of long-term investing. Declines can certainly continue, and we have seen that a few times over the past five years. In general, however, corrections have been a good time for investors to look for opportunities, along with reassessing and strengthening their portfolios.

Chart showing largest calendar year peak-to-trough S&P 500 drawdown. The S&P 500 has experienced a median annual drawdown of 10% during the last 40 years. — Source: Goldman Sachs Global Investment Research, as of March 17, 2025

What to Watch Going Forward

Uncertainty remains in the markets, and a few major themes will likely continue to drive headlines: tariffs, inflation, and questions around economic growth. The new quarter appears to be starting with renewed focus on trade policy, followed by a closely watched jobs report this Friday. That report could calm investors’ concerns about the health of consumers—or raise more questions about future spending.

We’ll also hear from companies as they report first-quarter earnings. Interestingly, in recent months, fewer companies mentioned the term “recession” than at any point over the past seven years, according to FactSet data. In just a couple of months, we’ll get a clearer sense of how businesses are feeling about the economy and how their outlooks compare with expectations coming into the year.

The Federal Reserve (Fed) is another important factor. Its next meetings are scheduled in the first week of May and the third week of June. Although the Fed continues to base decisions on incoming data, signs of slowing growth could influence whether it adjusts interest rates in June.

Looking ahead, interest rates, valuations (how expensive or cheap stocks are), and earnings growth are critical to understanding how the market will move. We’ll be watching all of them closely as we receive updates in the weeks and months ahead.

What Should You Do?

It’s understandable to feel uneasy in times like this, but markets have gone through plenty of ups and downs before. The best thing investors can do is ensure that their portfolios are aligned with the long-term objectives they are trying to achieve. Look for opportunities to rebalance portfolios when they get out of line with those objectives. Diversification—owning a mix of different investments—has helped weather some of the volatility this year, and we expect that to continue. No single strategy works all the time, but we believe having a well-rounded approach can be an effective way to navigate uncertain markets.

* A 60/40 hypothetical portfolio is an allocation represented by 45 percent Russell 3000 Index, 15 percent ACWI ex U.S. Index, 34 percent Bloomberg U.S. Aggregate Bond Index, and 6 percent Bloomberg 1-3 Month U.S. Treasury Bills Index, for illustrative purposes only. Unlike investments, indices do not incur management fees, charges, or expenses. No specific investments were used in this example. Actual results will vary.

The MSCI ACWI ex USA Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Developed and Emerging Markets. The MSCI ACWI ex USA does not include the United States. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

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Fitzgerald Financial Group is located at 727 East Landis Ave, Suite 1, Vineland, New Jersey 08360 and can be reached at 856-692-0022. Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance.

Authored by Chris Fasciano, chief market strategist at Commonwealth Financial Network®.