The first quarter of 2025 presented investors with a challenging and volatile market landscape, marked by policy uncertainty following the new administration’s implementation of tariffs and shifts in immigration policy. After two consecutive years of 20%+ gains in the U.S. stock market, Q1 delivered disappointing returns as markets grappled with several competing factors: resilient economic growth, persistently higher-than-expected inflation, the pace of Federal Reserve rate cuts, and uncertainty around implementation of tariffs by the Trump administration which as we write this was scheduled to be announced this week.
The U.S. economy entered 2025 with strong momentum, with GDP expected to grow around 2.2% in 2025, though showing signs of moderation as the year progresses. Survey-based and alternative economic data has weakened in recent months as consumers and businesses grapple with the policy uncertainty out of Washington resulting in heightened concern about the prospect of stagflation or a recession. In contrast, “hard” economic data, data which is quantitatively based, continues to be strong. In short, many are feeling more uncertain about economic prospects but that has yet to show up in economic activity. For example, despite strong earnings and sales growth, with 54.5% of S&P 500 companies beating sales expectations and 74.6% exceeding earnings expectations, the S&P 500 Index is currently down 4.6% for the year[1]. This is well within the realm of the average drawdown of 14%, see chart below.
[1] Bloomberg
The 10-year Treasury yield has declined from 4.57% to 4.24% over the course of the first quarter. This is based on the combination of lower expected economic growth in the near-term, risk aversion, and potential deficit reductions. The Federal Reserve has maintained a patient approach keeping interest rates steady at its March meeting awaiting clarity on the net effects of Trump economic policy. At the March meeting, the Federal Reserve lowered projected economic growth and raised inflation expectations for this year.
Looking Ahead
This investment environment continues to favor a balanced diversified approach, and patience. With the likelihood of continued volatility, opportunities can arise as markets overreact to news in the short-term. While we maintain a cautiously optimistic outlook for the remainder of 2025, investors should prepare for more moderate returns compared to the exceptional performance of the past two years. We have also positioned our portfolios for greater flexibility to take advantage of any potential extended downturns in financial markets.
Favorability Scale
The sliding scales below are meant to represent HFM’s current assessment of favorability of the market landscape in various investment areas as of the most recent quarter end. Our investment committee is looking to communicate to you a complicated thought process as simply as possible. The favorability scale considers the following factors: Current Yield, Growth, Value, and Market Conditions.
The information contained here should not be construed as a recommendation to purchase or sell any particular security or an assurance that any particular security held in a portfolio will remain in the portfolio or that a previously held security will not be repurchased. Securities discussed may not represent a portfolio’s specific or entire holdings. It should not be assumed that any security transactions or holdings discussed have been or will prove to be profitable or that future investment decisions will be profitable or will equal or exceed the investment performance of the securities or portfolios discussed.
Equity Favorability
HFM Strategic Equity Positioning (Long Term)
Stocks remain attractive with corporate earnings continuing to beat Wall Street estimates. While a pullback is normal, especially given the uncertainty in Washington, we remain MORE favorable on Equities in Q1.
HFM Tactical Equity Positioning (Short Term)
Large Cap
The mega-cap stocks have had “frothy” valuations and were due for a pullback. Overall, the Large Cap stocks are still attractive over the long-term. We remain MORE favorable in this segment.
Small Cap
Small Cap stocks continue to struggle in a higher interest rate environment and will experience more volatility in an environment of more economic uncertainty. We remain LESS favorable in this segment.
Cutting Edge
Capital continues chasing A.I. and other Cutting Edge segment technologies. We increase our outlook to NEUTRAL as valuations have become more reasonable.
International
Fiscal stimulus announcements in Europe and China have moved international stocks higher. Continued headwinds facing Asian and European economies make us LESS favorable on this segment despite international stocks performing well in 2025.
Hedged Equity
With increased market volatility, increased geopolitical risks, and continuous administration policy changes, the hedged equity strategy helps to reduce the downside market risks. We remain MORE favorable on the Hedged Equity segment in Q1.
Fixed Income/Bonds Favorability
HFM Strategic Fixed Income Positioning (Long Term)
Fixed Income yield levels remain attractive, however the reward for taking credit risk also remains low in a historical context for many sectors. These attractive current yield levels may lessen the impact of potential adverse economic developments. We remain MORE favorable on Fixed Income.
HFM Tactical Fixed Income Positioning (Short Term)
Investment Grade Bonds
Overall Investment Grade Fixed Income sector yield levels remain attractive in historical context, however the compensation for taking default, downgrade, and other risks remains low versus historical norms. Higher quality Investment Grade bonds possess more favorable attributes for potential recessionary economic environment. We remain NEUTRAL on Investment Grade bonds.
High Yield
The High Yield sector continues to offer attractive yields, but compensation for default, downgrade, and other risks continues to remain low in historical context, i.e., past 15+ years. While yields are attractive, the High Yield sector has greater downside performance risk should economic fundamentals deteriorate, or a recession occur. Limit investments to tactical allocations to high quality, favorably structured bonds. We remain LESS favorable on High Yield bonds.
Alternatives Favorability
HFM Strategic Alternatives Positioning (Long Term)
Given global trade uncertainties and potential tariff impacts, we favor alternative investments positioned to capitalize on market dislocations. Their non-correlation to traditional asset classes could provide a good return source for a stagflation economic scenario. We remain MORE favorable on Alternatives.
