A Reversal of Post-Election Optimism
Strong Q4 gains gave way to a more cautious tone in the first quarter
Equity markets were challenged during the first quarter following strong Q4 gains, as post-election euphoria around regulatory relief and the pro-business policies of the incoming administration gave way to heightened concerns that tariffs and forced onshoring would crimp economic growth and corporate profits.
The S&P 500 Index fell 3.5% during the quarter and, as of this writing, sits close to correction territory, off 7.8% from its February 19 all-time high of 6,113. The S&P Equal Weighted Index fared better, off only fractionally year-to-date, but also down over 7.0% from its high. The relative resilience of the equal-weighted index underscores the rotation away from the large-cap technology names that powered performance in 2023 and 2024.
"Markets are not yet incorporating the potentially negative corporate profit impact arising from a reduction in U.S. soft power as the country looks increasingly inward."
Performance Across Sectors, Styles, and Geographies
Defensive sectors and international markets led; growth and consumer lagged
On a sector basis, traditional safe havens outperformed while cyclically sensitive areas of the market lagged badly. Style performance reflected the same defensive tilt, with value indices substantially outperforming their growth counterparts. Geographically, just as many investors had written off the rest of the world, European and Asian markets roared back in the face of U.S. policy uncertainty.
| Segment | Q1 2025 / YTD |
|---|---|
| U.S. Sectors | |
| Healthcare | +6.9% |
| Real Estate | +4.7% |
| Utilities | +3.1% |
| Technology | −8.2% |
| Consumer Discretionary | −12.3% |
| Style | |
| Russell 1000 / 3000 Value | +1.0% (approx.) |
| Growth (relative to Value) | ~−1,000 bps |
| Commodities & Fixed Income | |
| Gold | +16% |
| Long-Term Treasuries | +4.5% |
| International | |
| Hang Seng Index | ~+20% |
| France / Germany / Italy | +10% to +20% |
Consumer stocks were particularly weak, off close to 20% from their highs as households and businesses absorbed the implications of an unsettled trade environment. Fixed income markets, especially at the long end of the curve, benefited from the prospect of progress in reducing the federal deficit, with the ten-year Treasury yield dropping from a January high of 4.8% to 4.3% by quarter end.
For illustrative purposes only. Yield trajectory reflects general direction across the quarter rather than daily closing values.
The Soft Landing Thesis Under Pressure
Trade and policy uncertainty has shifted expectations sharply
A combination of trade and policy uncertainty has upended expectations for a soft landing. The Atlanta Fed's GDPNow indicator, which had been forecasting solid growth into mid-February, has collapsed over the past several weeks and now cautions that GDP growth could be sharply negative in the first quarter.
Partly as a result, corporate earnings growth — recently robust, with estimates marching higher — has begun to adjust downward. Some forecasters now project S&P 500 earnings per share of $260-265, down approximately 4% from the December 2024 peak. Taking $270 as a baseline, the market is currently trading at roughly 20.9 times the 2025 earnings estimate. With rates down, the equity risk premium has expanded but remains well below historical averages, suggesting that equities are not as attractively valued relative to fixed income securities as the recent drawdown might imply.
Forecast collapsed from solid growth in mid-February to cautioning that Q1 GDP could be sharply negative — a dramatic reversal driven by tariff anxiety and deferred spending.
2025 S&P 500 EPS forecasts have moved to $260-265 from the December peak — a ~4% reduction that, in our view, does not yet reflect the full impact of deferred capital and consumer spending.
Has expanded as rates fell, but remains well below historical averages — meaning equities still are not as attractively valued relative to fixed income as the drawdown might suggest.
The Trade Policy Question
Why we are skeptical of the populist case against the free trade regime
The recent tumult in the market has been driven, in our view, by a shoot-from-the-hip approach to trade and economic policy. At the very least, chaotic decision-making at the federal level will lead corporate executives and consumers alike to defer spending until the rules of the road become clear. That deferred spending, we believe, has not yet been reflected in earnings forecasts.
We are frankly puzzled by the broad-based populist rejection of the free trade regime that has made the U.S. economy the envy of the world. Over the past twenty-five years, GDP per capita has stagnated in the United Kingdom, France, Germany, Italy, and Japan, while nearly doubling in the United States. American corporate profits have been driven by a combination of domestic innovation, improving worker productivity, and efficiencies from globalized supply chains. Margins over the past 15 years have nearly doubled.
Enacting policies designed to force corporate onshoring of manufacturing production will, almost by definition, cause operating margins to decline. We see little offsetting benefit at scale: manufacturing jobs as a percentage of total nonfarm employment have been under 20% since 1980, and over the past 15 years — as corporate profits exploded — manufacturing's share of total employment fell modestly from 9.3% to 8.1%.
Driving inflation for the other 91% of the population seems like a steep price to pay for marginal employment gains. The one mitigating factor on margins: roughly 45% of S&P 500 earnings come from sectors such as healthcare, utilities, and financials that are relatively insulated from tariff exposure.
"Tariffs are inflationary, while the revenue they generate is unlikely to offset the cost to consumers and businesses alike."
Market Implications and What We Are Watching
Elevated valuations meet rising headline risk — but real positives remain in view
The recent drawdown notwithstanding, equity market valuations remain elevated. At the same time, uncertainty with respect to economic and trade policy is likely to create headline risk that will, at least in the near term, obscure the positive implications of regulatory relief and pro-business policies at the federal level. We are hopeful that rational decision-making prevails and that populist ideology will be confined to rhetoric. Balancing this picture, we keep our attention on the following:
Risks We Are Monitoring
- Tariffs are inflationary, and the revenue they generate is unlikely to offset the cost to consumers and businesses
- Deferred corporate and consumer spending is not yet reflected in earnings forecasts
- Reduced U.S. soft power as the country looks inward may weigh on multinational profits in ways markets are not pricing
- Equity valuations remain elevated, with the equity risk premium below historical averages
Positives We Are Tracking
- Reducing waste in government is an indisputable positive that should marginally reduce federal spending and borrowing
- Growing political willingness to address entitlements, defense, and interest — which together account for ~80% of the federal budget
- AI-powered productivity gains continue to compound across the economy
- The pro-business regulatory environment, while temporarily obscured, remains intact
To the extent fiscal stability efforts succeed, the combination of AI-powered productivity gains and a pro-business regulatory environment could, in our view, spark a powerful bull market. As such, we remain constructive — particularly for those investors with an intermediate- to long-term time horizon.
Positioning and Outlook
Constructive over the intermediate to long term, mindful of near-term headline risk
Our positioning reflects a balance between the near-term risks created by an unsettled policy environment and the longer-term structural tailwinds we believe remain firmly in place. We continue to favor businesses with pricing power and limited tariff exposure, complemented by selective participation in sectors leveraged to AI-driven productivity gains. We are also maintaining meaningful exposure to areas of the market — including value-oriented holdings and select international positions — that have lagged the dominant large-cap technology trade but offer attractive valuations and improving fundamentals.
We will continue to evaluate the evolving policy landscape and adjust positioning as the facts warrant. In the meantime, we encourage clients to take a longer view of the current volatility and to use periods of market stress as opportunities to deploy capital strategically rather than reactively.
We appreciate the confidence and trust you place in us. To the extent we can elaborate or clarify our perspective on your portfolio or the market in general, please be in touch — we like hearing from you.
— Atlas Meridian Capital