Q1 2025 Quarterly Market Outlook: Into the Unknown

By Liz Levy, CFA, Managing Director of Investment Research 

As March and the first quarter drew to a close, I told the rest of the Clean Yield investment team that I was starting work on this Outlook. One of them asked me what exactly my outlook was. My only-half-joking reply included a word I won’t repeat here, but the gist was, “How should I know?” Unfortunately, that sentiment, expletive included, seemed to be more or less how the market dealt with the first few months of the Trump administration – and the chaos it brought with it – and in our view, it’s this very uncertainty that’s likely to drive markets in the near term.

Last quarter, we noted that stocks had wrapped up a banner year, riding the enthusiasm of Trump’s win and expectations of deregulation and tax cuts. But we also flagged potential economic – and human – costs tied to his immigration, tariff, and “cost-cutting” campaign promises. We pointed out that the strong market returns in 2024 had been driven by a small group of technology stocks and that the strength had left the market at stretched valuations at the end of the year.  

Stocks pulled back slightly in late December but resumed an upward trend into the first quarter, until the first tariffs entered the conversation. Or didn’t. Or did again. And that uncertainty set the tone for the rest of the quarter. Investors expressed discomfort with the uncertain policy environment by selling, and the S&P 500 index briefly entered technical contraction in March, down 10% from recent highs, before recovering slightly. By the end of the quarter, the S&P was down 4.6% from the year end. 

Tellingly, the stock market performed quite defensively for the full quarter.

During times of economic stress or unease, stocks of companies that are more stable and less dependent on discretionary spending tend to perform better than those that are more dependent on economic growth, and large companies tend to outperform smaller ones. That is exactly what happened this quarter. Defensive sectors such as Utilities, Health Care, and Consumer Staples returned 4.1%, 6.1%, and 4.6%, respectively. Economically sensitive sectors, such as Information Technology and Consumer Discretionary, returned -12.8% and -14%, respectively. The S&P 600 index of small companies returned -9.3% compared with the S&P 500 large companies at -4.6%. One additional interesting dynamic this quarter is that Trump seems to have succeeded in making European stocks great again, after years of underperforming American ones, with the Stoxx 600 Index of European companies returning 5.2% for the quarter.

Where to Next?

What comes next is, of course, the key concern. But it is also, unfortunately, unclear right now, and this prolonged uncertainty is likely to drive markets, at least in the near term. The announcement of global “reciprocal” tariffs in early April, far from providing certainty, dramatically increased uncertainty as consumers and companies now wait to see how other countries respond and whether realized tariffs are higher or lower than the extreme levels initially imposed. Spending decisions are being put on hold at all levels, from family to factory, as decision-makers understandably wait to see what price they may soon pay for goods. 

Reviewing quarterly earnings from our portfolio companies, I was struck by how much the tone shifted between January and March. From companies reporting early on, there were brief mentions from most about how tariffs were still an unknown, but they dealt with them last time around and would deal with them this time. By the time the later reports rolled around, companies were more direct about passing costs on to customers. Companies reporting later in the quarter were able to factor into their guidance the already-announced tariffs, such as those imposed on China and Mexico, but no companies were willing or able to comment on the potential effects of anticipated tariffs, such as April’s reciprocal tariffs. 

The final two companies in our portfolio to report this quarter were both consumer-facing–spice manufacturer McCormick and athletic clothing brand lululemon. McCormick noted increased American consumer uncertainty and fears of rising inflation increasing, particularly in March, and commented on the challenge of providing guidance in the current “dynamic environment.” On its quarterly call, lululemon also called out the “dynamic macro environment” and said that results of the company’s polling reflected consumer caution about spending caused by inflation and the overall state of the economy. The University of Michigan Consumer Sentiment Index survey data published at the end of March confirmed these comments, with sentiment tumbling to the lowest level in years and inflation expectations climbing.

When reading investment news and research, I find it helpful to remind myself that many (but not all!) market participants do not share my worldview, and I make a point to read perspectives different from my own. Lately, many of these research reports have been focused exclusively on the impacts of uncertainty from tariff policy. But I find myself also concerned with the broader, growing uncertainty across policy and governance. For example, the entire renewable energy industry is waiting to see how much and which parts of the Inflation Reduction Act, which would have provided them with stability for years, will be repealed. 

Similarly, a recent article from the nonprofit climate journalists at Floodlight documented the plight of family farmers and small businesses that had made renewable energy investments relying on approved grant applications but were told they needed to rewrite their applications to focus on the new administration’s fossil-heavy energy policies to receive the previously authorized funding. This is similar to the “warning” the Trump administration gave auto manufacturers not to pass on the thousands of dollars per vehicle of tariffs to consumers. Or what? Would the government seek to punish individual car companies for raising prices to cover additional costs? Well … maybe. Just look at the way law firms are being treated, with individual firms being singled out. So, I am concerned about the level of rising systematic risk, which I fear is now endemic in the U.S. And I fear that the folks who should be paying attention – in this case, macro economists and other market participants – aren’t, or aren’t as worried as I think they should be.  So how are we positioning portfolios for this level of risk and uncertainty? We expect continued market volatility, particularly in the second quarter, as companies, consumers, and other countries react and respond to tariffs. Six months ago, it seemed that we had dodged the bullet of recession; now, tariff and trade policies have reanimated that fear.

While Kofi and I have been gradually shifting the equity portfolios to a more balanced position, both our stock selection and overall asset allocation remain defensively positioned – something that served our clients well in the first quarter and into the early second quarter.

Within equities, we will continue to seek out stocks of high-quality companies, with strong balance sheets less reliant on debt and with products, services, and innovation that are valued by their customers. We’re also staying disciplined on valuation – avoiding the temptation to chase momentum or overpay for growth. The dislocation in the stock market early in the second quarter may provide opportunities to own stocks that had been too richly valued previously, but we will continue to be mindful of the macro context and carefully monitor positions, portfolios, and markets.

Finding the Silver Lining

Despite the macro context of the world around us, our job remains the same: managing our clients’ portfolios in a way that is consistent with our shared values. Our commitment remains to maximize the positive impact of our clients’ financial assets while meeting their financial goals, through proxy voting, shareholder advocacy, and impact investing. 

This work has become more challenging. Government pressure and political rhetoric are making some companies more hesitant to speak openly about their commitments to sustainability and social progress. But that won’t deter us.

We will continue to seek out mission-aligned investments and advocate on behalf of our clients, regardless of the political climate.

Political fear and pressure make our job harder, as companies talk less about their commitments to sustainability and social progress. But that doesn’t mean we will stop seeking these investments or advocating on behalf of our clients.

In seeking a silver lining to the gray cloud hanging over us all at the moment, I’m actually finding some solace in recent conversations with some large companies. We will share a full shareholder advocacy update at the end of the spring proxy voting season, but for now, I do want to share one of my takeaways from the company dialogues I’ve had over the past few months. Not a single company I spoke with has made a change to actual business practices as a result of the new federal environment. None have rolled back reproductive health benefits, changed hiring practices, or discontinued products that have fallen out of political favor. 

The number of companies I’ve spoken with is admittedly a small sample size, and there are certain to be many companies that either choose or are forced to make changes. But I’m also heartened by some recent proxy voting results. Investors in name-brand American companies, including John Deere, Apple, Costco, and Disney all were given the choice at recent annual meetings to vote for the companies to back off their commitments to diversity, equity, and inclusion. In all four cases, the investors overwhelmingly told the companies to keep this focus. None of these proposals earned the vote of more than 3% of the companies’ investors, an astonishingly small vote total revealing that, despite hateful rhetoric being spewed by politicians, investors recognize that a strong, diverse, and inclusive workforce is an asset, not a liability. 

While these are certainly frightful times to be living in, I find solace in knowing that there are other folks out there, even in unexpected pockets like the shareholder base of John Deere, with whom I can find common ground, who also recognize the importance of diversity, equity, and inclusion, regardless of the tone from polemics decrying it. We will continue to use our voice and other tools on behalf of our clients, even in these trying times, to support our communities and values.