Q1 2025 ended with stark divergence in regional performance, driven by geopolitics, policy surprises, and sector-specific risks. What began as a promising start to the year, supported by solid economic data and resilient consumer demand, shifted abruptly toward risk aversion. The reintroduction of aggressive US tariffs under the new Trump administration sparked fears of a trade war and stagflation, leading to sharp losses in US equities and tech-heavy indices. Meanwhile, Europe experienced a fiscal renaissance, China leaned into AI and pro-growth reforms, and safe-haven assets surged. While volatility may persist, the quarter’s events are shaping a new global investment narrative - one where policy-driven dispersion and strategic selectivity are key.
Equities
The equity market narrative turned sharply in March, driven by a combination of political shocks and valuation resets. The S&P 500 fell -5.6% during the month and -4.3% for the quarter, its worst showing since 2022. These declines reflect more than technical profit-taking, they mark a reassessment of US exceptionalism in a world of rising trade barriers and inflation. President Trump’s sweeping and punitive return to protectionist tariffs introduced renewed concerns about a growth-inflation mismatch. Tech stocks were particularly hard hit: the NASDAQ fell -10.3%, and the Magnificent 7 collapsed by -16%, as the launch of China’s DeepSeek AI model and Ant Group’s cost-efficient training techniques challenged US AI leadership, casting doubt on premium valuations.
In contrast, European equities delivered strong relative outperformance, aided by an historic policy pivot. Germany’s new coalition agreement, announced after the February election, included a plan to amend the constitutional debt brake and deploy over EUR 500bn in infrastructure and defense spending. The market response was swift: the DAX rose +11.3% and the STOXX Europe 600 gained +5.9%, its best quarter relative to the US in over a decade.
The policy divergence between the US and Europe was mirrored in sentiment. While US consumer confidence dropped to its lowest since early 2021 and inflation expectations hit levels not seen since the 1990s, the eurozone saw rising optimism as stimulus expectations improved. Nevertheless, European assets are not immune to external risks, particularly if tariff retaliation escalates and weighs on global trade.
Emerging markets posted modest gains (+3.0% for the MSCI EM Index), led by China, where a pro-business policy pivot and a focus on AI development fueled a 15% quarterly gain in local equity markets. Brazil also performed well, with the Bovespa rising 8.3%, supported by a stable domestic macro backdrop. India remained an outlier on the downside, pressured by rich valuations and disappointing earnings. While aggregate EM returns were muted, intra-EM dispersion remains a key theme for alpha generation in 2025.
Fixed Income
Fixed income markets entered Q2 navigating a complex mix of sticky inflation, shifting central bank strategies, and rising political risk. While bond investors started the year pricing in a synchronized global easing cycle, March proved to be a reality check. The combination of aggressive US trade measures and resilient economic data has delayed expectations for near-term Fed rate cuts.
In the United States, Treasuries delivered a solid +2.9% total return for Q1, with longer durations outperforming as recession concerns resurfaced. Yields on 10-year Treasuries fell 36 basis points to 4.21%, driven by softening economic indicators, declining real yields, and renewed investor demand for duration. However, the inflation outlook remains complicated. The core PCE inflation rate, the Fed’s preferred gauge, reaccelerated to a 3.6% annualized rate in February, and long-term consumer expectations ticked up to multi-decade highs. These inflation signals, amplified by tariff risks, have raised questions about the timing and pace of future rate cuts. While the Fed continues to signal two rate cuts in 2025, markets now see a more cautious path, especially as the disinflation narrative loses clarity.
In Europe, bond markets reflected a different story. The European Central Bank delivered two 25bps rate cuts during Q1, lowering the deposit rate to 2.50% as inflation continued to trend lower. However, fiscal policy took a sharp turn in the other direction. Germany’s announcement of a EUR 500 billion infrastructure and defense spending program, enabled by plans to reform its constitutional debt brake, sparked a sharp rise in bond yields. The 10-year Bund yield rose 37bps to 2.74%, leading to a -1.8% loss for German government bonds in Q1.
Despite the move in sovereign yields, European investment-grade credit proved resilient, with spreads tightening over the quarter. This suggests that investors continue to see robust corporate fundamentals as an anchor in an otherwise volatile macro environment. US credit markets also held up well; although spread volatility increased modestly in March.
Elsewhere, emerging market debt benefited from a weaker US dollar and the sharp fall in US real yields drove inflation-linked bonds to outperform their nominal counterparts, as investors sought protection against a potential resurgence in price pressures driven by tariffs.
Commodities and Currencies
One of the most striking trends of the quarter was the rotation into real assets. Gold surged +19% in Q1, reaching an all-time high of USD 3’124 per ounce as investors hedged both inflation and geopolitical risk. Central banks were again large buyers, and ETF flows picked up meaningfully in March. Copper also rallied sharply (+25%), driven by structural tightness in supply and frontloaded demand due to tariff risks. Crude oil prices advanced 2.6% in March, supported by concerns over potential supply disruptions stemming from prospective US tariffs on Russian exports and heightened geopolitical tensions with Iran.
On the currency front, the US Dollar Index weakened by -3.16%, reflecting an increased U.S. policy uncertainty, while the EUR relatively strengthened, bolstered by fiscal optimism and inflows into European equities.
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