Diversification triumphed in the first quarter of 2025, helping investors weather the choppy seas left in the wake of tariff uncertainty, the threat of trade war, and a potential slowdown in economic growth. While the S&P 500 Index lost -4.27% over the quarter, a basic 60/40 portfolio, which combines the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index, lost only -1.45%. A fully diversified portfolio performed even better, actually gaining, 0.61% in Q1.
A turbulent first quarter
It was a turbulent quarter for U.S. stocks with the S&P 500 Index hitting correction territory in early March. Domestic stocks experienced significant losses, as markets reacted to President Trump’s tariff announcements, and investors witnessed the “American Exceptionalism” trade fail in the first three months of 2025.
| Q1 2025 | 2024 | |
|---|---|---|
| S&P 500 Index | -4.27% | +25.02% |
| 60/40 Portfolio | -1.45% | +15.04% |
| Diversified Portfolio | +0.61% | +9.64% |
| Equities | ||
| Large Cap Growth | -9.97% | +33.36% |
| Large Cap Value | +2.14% | +14.37% |
| Mid Cap Growth | -7.12% | +22.10% |
| Mid Cap Value | -2.11% | +13.07% |
| Small Cap Growth | -11.12% | +15.15% |
| Small Cap Value | -7.74% | +8.05% |
| Int'l Developed Markets | +6.86% | +3.82% |
| Emerging Markets | +2.93% | +7.50% |
| Commodities | +8.88% | +5.38% |
| REITs | +1.17% | +4.92% |
| Fixed Income | ||
| Intermediate-Term Bonds | +2.42% | +3.00% |
| Short-Term Bonds | +1.63% | +4.36% |
| High Yield | +1.00% | +8.19% |
| TIPS | +4.17% | +1.74% |
| Int'l Bonds | +2.53% | -4.22% |
| Emerging Market Bonds | +2.24% | +6.54% |
| Bank Loans | +0.48% | +8.95% |
| Liquid Alternatives | ||
| Global Hedge Funds | +2.51% | +5.27% |
Diversified portfolio: 30.6% Russell 3000 TR; 16.6% MSCI ACWI Ex US NR; 23.80% Bloomberg US Gov/Corporate Intermediate TR; 15% HFRX Global Hedge Fund; 6.7% Bloomberg Gbl Aggregate Ex US TR; 3.8% Bloomberg Commodity; 1.5% Bloomberg High Yield Corporate TR; 2% FTSE Treasury Bill 3 Months.
The S&P 500 Index and Nasdaq Composite Index both posted their worst quarters since 2022, with the tech-heavy Nasdaq losing -8.14%. The high-flying Magnificent 7 stocks all experienced sharp declines in Q1, with the group of big tech stocks down over -15%. While each of the Magnificent 7 stocks traded in the red for the quarter, some losses were deeper than others. Tesla (TSLA) lost -35.83%, Nvidia (NVDA) -19.29%, Alphabet (GOOGL) -18.20%, Amazon (AMZN) -13.28%, Apple (AAPL) -11.20%, and Microsoft (MSFT) -10.74%. Only Meta (META) was able to outpace the S&P 500 Index, returning -1.47%. In a bright spot among domestic equites, while tech stocks suffered, defensive sectors such as utilities and healthcare outperformed and diversified investors benefitted from a rotation into value from growth, with value widely outpacing. The Russell 3000 Value Index gained 1.64% over the quarter, compared to a -10.00% loss for the Russell 3000 Growth Index. Small caps, on the other hand, still hurt from a diversification perspective, as they continued to underperform their large cap counterparts.
While domestic stocks struggled considerably over the quarter, international stocks shined led by rallies in Europe and China. Diversified investors enjoyed a boost in portfolio performance as international equities outpaced domestic stocks by one of the widest margins seen in some time. The MSCI ACWI ex USA Index gained 5.23% in Q1, compared to the Russell 3000 Index’s loss of -4.72%. Developed stocks led the charge as the MSCI EAFE Index gained 6.86%, with European stocks posting one of their strongest quarters in over a decade. The strength seen from Europe was spurred in large part by Germany’s initiative to ramp up defense and infrastructure spending, in a historic vote by the country’s government to do away with decades of fiscal limits on defense spending. The UK, Spain, Norway, Italy, and Ireland all also saw strong performance in the first quarter. Emerging markets equities posted gains as well, with the MSCI EM Index returning 2.93%, aided overall by a falling U.S. 10-year Treasury yield and a weaker dollar. The MSCI China Index spiked 15.02%, driven mostly by increased fiscal stimulus expectations and AI optimism surrounding DeepSeeks’s release of its R1 AI models. Brazil and South Africa also saw strong gains over the quarter.
Opportunities outside of equities
Bonds acted as a solid ballast within investors’ portfolios as well, as yields shifted lower in the first quarter. The yield on the benchmark 10-year U.S. Treasury note ended the quarter at 4.23%, down from 4.58% at year-end. Both domestic and international bonds posted comparable positive returns over the quarter, with Bloomberg US Aggregate Bond Index gaining 2.78%, just slightly outpacing the 2.53% return of the Bloomberg Global Aggregate Ex USD Index. Returns across most fixed income sub-asset classes were generally positive as well (though the riskier segments of the marketing tended to perform the worst) with short-term, high yield, bank loans, and emerging market debt all posting gains.
Alternatives also contributed positively to a diversified investor’s portfolio. Commodities in particular posted strong gains over the quarter, driven by precious metals, industrial metals, and energy. The Bloomberg Commodity Index returned 8.88%, boosted by a roughly 19% rise in gold over the quarter. The precious metal reached a record high of over $3,1000 an ounce, as investors flocked to the safe-haven asset amidst tariff and global economic uncertainty. Outside of commodities, liquid alternatives also generally aided diversified investors in smoothing out portfolios returns, with the HFRX Global Hedge Fund Index gaining 2.51% in Q1. REITs also performed well, with the FTSE Nareit All Equity REIT Index returning 2.75%.
Looking forward in 2025
Albeit hard to ignore the 25%+ returns of the S&P 500 Index in 2023 and 2024, this isn’t the first time we’ve seen diversification prove it’s worth when markets have struggled. The year prior, in 2022, we witnessed the S&P 500 Index fall -18.11% and a basic 60/40 portfolio fall -15.79%, while a fully diversified portfolio lost only -11.80%. Still, many have questioned the validity of diversification with the unprecedented outperformance of domestic stocks over the past decade. But diversification may now be more important than ever considering the shifting landscape of the current market environment. For one, extensive U.S. tariffs announced by the Trump administration have disrupted international trade and sent shockwaves through the globally economy, causing market volatility to increase in force. This is not guaranteed to be short-lived. Moreover, global uncertainties and heightened geopolitical tensions persist, with tariff headlines only exacerbating matters. Stagflation has also become a concern for the U.S., and the dollar’s recent weakness suggests some investor concern with regards to U.S. economic growth. It has also left some questioning the dollar as the dominant global currency reserve. Aggressive tariff policy could potentially negatively impact U.S. inflation as well, though not necessarily.
These factors, compounded with President Trump’s political style, may increase the odds of some global economic uncertainty over the next four years and diversification could prove to be a valuable tool to help investors navigate the potential ups and downs.
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