First Comes Q1, Then Comes Havoc

For the quarter ended March 2025.

Well, this is going to be tricky. Writing about Q1 in early April feels a bit like rehashing last year’s election while everyone’s currently obsessed with DOGE and tariffs. Confused? Join the club. That said, the first quarter did bring a shift in market leadership. U.S. stocks took a hit, while foreign equities posted respectable gains. Cue the chorus predicting a long-term rotation into Europe—and maybe even Japan. But early Q2 action is already throwing some cold water on that thesis.

One trend that is holding up? The ongoing underperformance of small-cap stocks versus their large-cap counterparts. Pick nearly any time frame over the past 15 years, and the story’s the same. My long-standing theory? Institutional money has increasingly favored private equity over public small caps, skewing the supply-demand dynamic. The result: a buoyant PE market and a chronically lagging small-cap space.

On the fixed-income front, bonds staged a comeback in Q1, courtesy of a good old-fashioned flight to safety. The domestic bond market gained 2.8%, with Treasuries outperforming high-grade corporates, which beat out high-yield. Translation: if you avoided credit risk, you came out ahead. Longer-duration bonds also topped shorter ones as yields fell across the curve.

Daily-traded alternative assets like commodities, equity infrastructure, and real estate turned in solid Q1 performances. Hedge fund strategies were mixed – results depended on the objective. Meanwhile, private market assets were generally flat to up 2–3%. And yes, a good chunk of that "low volatility" is simply because these assets aren’t priced daily. But hey, that may not be such a bad thing when market psychology regularly steamrolls fundamental value.

And with that, welcome to Q2. If the early action is any indication, it’s going to be one wild ride.

Quick Read

• Tariffs on U.S. Imports

• Economic Growth and the Composition of GDP

• Survey Data

• Public Market Declines and Private Market Responses

• Manager Selection in Public and Private Markets

• Performance - Equities

• Performance – Fixed-Income

• Performance – Alternatives

Highlights

• Q4 GDP came in at 2.4%; Q1 estimates are significantly lower. Consumption was the main driver, while business investment and inventories detracted.

• February inflation registered at 2.8%, with core inflation at 3.1%.

• March wage growth hit 3.9%, with unemployment at 4.2%.

• U.S. stocks fell 4.8% in Q1 and are up just 7.1% over the past year.

• Emerging markets rose 3.0%, while developed markets gained 7.0% in Q1.

• Small caps continue to lag large caps—by wide margins—across all periods going back 15 years.

• Domestic bonds rallied 2.8% in Q1, up 4.9% over the trailing year.

• Treasuries outperformed high-grade credit, which in turn beat high-yield.

• Long-duration bonds outperformed short-term in Q1, though the reverse holds over longer timeframes.

• Commodities jumped 8.9% in Q1 and 12.3% over the past 12 months.

• Global infrastructure and equity real estate also posted gains for the quarter.

Tariffs on U.S. Imports

As of early April 2025, import tariffs seem to shift faster than the stock market on a caffeine binge. By the time this hits print, the numbers may already be stale – but for now, let's go with a 25% rate. Perspective matters, and in this case, it's a whopper. The last time tariffs were this high? 1905. Yes, 1905 – back when Teddy Roosevelt was president and international trade was more of a sideshow than a centerpiece of the economy. Will these tariffs stick? Who knows. But history offers a pretty blunt lesson: high tariffs tend to shrink trade and inflate domestic costs. It’s not rocket science – it’s just economics.

Source: Goldman Sachs Investment Research, United States International Trade Commission, J.P. Morgan Asset Management. For illustrative purposes only. Estimates about which goods are USMCA compliant come from Goldman Sachs Investment Research. Imports for consumption: goods brought into a country for direct use or sale in the domestic market. The estimate does not consider non-tariff barriers, such as value-added taxes. Figures are based on 2024 import levels and assume no change in demand due to tariff increases. Forecasts are based on current data and assumptions about future economic conditions. Actual results may differ materially due to changes in economic, market, and other conditions. Guide to the Markets – U.S. Data are as of April 7, 2025.

Economic Growth and the Composition of GDP

Aside from the not-so-minor hiccups of 2008 and 2020, U.S. GDP has followed a remarkably steady upward trajectory since 2001. That consistency has made the U.S. economy the envy of the world and delivered relatively superior outcomes compared to our global peers. The driving force? Us. The American consumer. Our collective willingness to swipe, tap, and splurge has proven a more resilient economic engine than state-driven models that prioritize exports over domestic demand (looking at you, China and Germany). But storm clouds may be forming. First-quarter GDP estimates are hovering somewhere between flat and a meager 1%. Oh oh…

Source: BEA, FactSet, J.P. Morgan Asset Management. Values may not sum to 100% due to rounding. Trend growth is measured as the average annual growth rate from business cycle peak 1Q01 to business cycle peak 4Q19. Guide to the Markets – U.S. Data are as of April 7, 2025.

Survey Data

With all the noise blaring out of Washington, it’s no surprise that uncertainty is on the rise—for both businesses and consumers. And when uncertainty spikes, decision-making hits the brakes. Case in point: surveys of future capital expenditures have taken a noticeable dive, while business and consumer confidence have recently fallen off a cliff—or at least tripped over the edge. To top off this unappetizing economic stew, both ISM manufacturing and services PMIs are hovering dangerously close to contraction territory. The takeaway? Don’t be shocked if a recession shows up soon… possibly at a theater—or economy—near you.

Source: BLS, Chief Executive Group, Conference Board, Federal Reserve Bank of Chicago, Federal Reserve Bank of Dallas, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of New York, Federal Reserve Bank of Richmond, ISM, NFIB, University of Michigan, J.P. Morgan Asset Management. *Average includes the Chicago Fed, Philly Fed, Richmond Fed, Dallas Fed, Kansas City Fed and NY Fed manufacturing surveys of future capital expenditures.  All surveys collect capital expenditure intentions for the next 6 months besides the Chicago Fed survey, which collects capital expenditure intentions for the next 12 months. Guide to the Markets – U.S. Data are as of April 7, 2025.

Public Market Declines and Private Market Responses

This isn’t exactly a state secret – large institutions have been leaning into private market investing for decades. Still, the two charts below are a timely reminder: when the stock market decides to claw back some of your hard-earned gains, other asset classes can help soften the blow. Take 2022, for example. While equities dropped 18%, direct real estate actually gained 7.5%. Zooming out, private equity has historically seen an average drawdown of just 5% during periods when public markets fell by 10% or more. The takeaway? If you're serious about diversification, private markets aren’t optional – they’re essential. A counterweight to stock market volatility.

Source: Blackstone - Morningstar, as of 12/31/2024. Private real estate reflect total annual returns for the NCREIF ODCE index. 2) Source: Cambridge Associates and Bloomberg, as of 3/31/2024. Based on quarterly returns from 6/30/1986. US PE represented by the Cambridge Associates US Private Equity Index.

Manager Selection in Public and Private Markets

It’s no secret that public stock and bond markets are efficient – painfully efficient. This holds true not just in the U.S. but across most developed and emerging markets. Translation: whether you're a seasoned pro or a DIY investor, consistently beating the market over the long haul is about as likely as winning a coin toss 100 times in a row. Private markets, however, are a different beast entirely. The performance gap between top and bottom-quartile managers is huge. That variability creates opportunity. So here’s the playbook: stick with beta in the public markets and hunt for alpha in the private ones. FYI - there is no beta in private markets.

Note: Past performance does not predict future returns. There can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses, or that alternative investments will generate higher returns than other investments. The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Source: Morningstar, Cambridge Associates. Returns are over a 10 - year period from January 1, 2014 to December 31, 2023. (Open-end funds): Public Equities (US Large Blend); Public Fixed Income ( US Intermediate Core Bonds); Public Real Estate (US Real Estate). Cambridge returns are for 2014 vintages that have last reported between January 1, 2014 to December 31, 2023. ( North America, Closed funds): Private Equity (Buyout, Growth & Secondary Funds); Private Credit (Senior Debt); Private Real Estate (Real Estate). Investments in less liquid private market strategies are by nature risky and typically involve a high degree of leverage. The returns indicated above are long - term and represent well-known asset class indices and are not meant to be predictive of the performance of any particular fund, nor are they meant to suggest that all private funds result in positive returns or would avoid loss of principal. (1 ) Returns shown for private asset classes are IRRs, while public asset classes show compound annual returns.

Performance - Equities

As we kick off April, talking about the first quarter feels a bit like trying to describe a moving target – thanks to recent market whiplash. Still, here’s how things shook out over the past three months: U.S. stocks dipped 4.8%, while emerging markets managed a 3.0% gain, and developed foreign markets cruised ahead with a 7.0% rise. Naturally, this sparked a fresh chorus of pundits declaring the decline of the U.S. and the triumphant return of international diversification. Back on home turf, tech stocks took a bruising, dropping 12.7%, while telecoms pulled a complete reversal, surging 20.4%. Style-wise, small caps continue to lag behind their large-cap cousins.

Performance – Fixed-Income

Ah, fixed income - our old friend who's had a rough few years. Inflation and a hawkish Fed basically buried any hope of bond market capital gains. These days, it's all about clipping coupons and preserving principal. Yes, bonds staged a comeback in Q1, rising 2.8% as the flight-to-safety trade kicked in. But don’t get too comfortable – most of that gain vanished by early April. Digging deeper: longer term fare bettered short-term bonds for the quarter while treasuries outperformed high-grade corporates, which in turn beat out high-yield. The takeaway? Keep your credit risk low in fixed income. Save the risk-taking for equities – they’re better built for it.

Performance – Alternatives

Daily-valued alternative (light) investments actually pulled their weight in Q1. While it’s long been clear they don’t deliver the same diversification punch as private markets, sometimes they still show up when it counts. Leading the pack: commodities surged 8.9%, global infrastructure climbed 7.6%, and listed real estate rose 2.9%. Zooming in on real estate by country, France and Japan posted low double-digit gains, while Germany took a beating – down nearly 12%. As for the past year? It’s been all about China. Why? Good question. It doesn’t make much sense to us, either. Frankly, China’s looking more like a house of cards than a growth engine for real estate.

Copyright © Consilium, LLC. Commentary and opinions herein consist of subjective judgments and are subject to change without notice, as are statements of economics, investments, and financial markets. Information provided is believed to be reliable but does not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument, security, or financial advisory service. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide for, accounting, legal, investment or tax advice. Investing may involve a greater degree of risk and increased volatility than readers of this publication may be aware of or comfortable with. Past performance does not equate to future results. Data sources: JP Morgan Guide to the Markets, Blackstone, and Morningstar Direct. Consilium, LLC – Registered Investment Advisor.