Elevage Partners first quarter market commentary
Uncertainty Explains the Rocky Start for Financial Markets in 2025
U.S. stock markets posted gains early in the first quarter. The S&P 500 Index, a broad measure of market performance, even closed at a record high of 6,144 on Feb. 19. But then uncertainty came knocking.
Concerns about an economic slowdown weakened consumer confidence. Sky high valuations for the dominant U.S. tech companies came down to earth as investors questioned the level of spending on artificial intelligence projects.
Chief Investment Officer Thierry Hasse
The administration’s ongoing efforts to streamline the federal government, including widespread layoffs, led to concerns about the strength of the labor market. Expectations for future job growth dropped sharply.
The widespread uncertainty over the near-term path of the economy prompted a rapid correction in the U.S. stock markets. The S&P 500 dropped more than 10% in less than a month. For the quarter, all U.S. stock markets finished with negative returns: -4.6% for the S&P 500 and -10.4% for the tech-heavy Nasdaq.
The mega cap U.S. technology companies have propelled broad stock market gains for the past few years. In the first quarter, however, they suffered the largest decline as investors are increasingly demanding better returns from massive capital expenditures on artificial intelligence technology (Source: briefing.com).
Fixed income market participants enjoyed a relatively quiet quarter. The 10-year Treasury Note yield fluctuated in a fairly narrow range of between 4.25% and 4.625%. The calm in the Treasury markets is a reflection of a Federal Reserve holding steady on monetary policy. The Fed has little room to maneuver as inflation remains over the 2% target and shows few signs of improving.
The Critical Question for Investors
Is the recent weakness in equity markets a normal correction? Or is it the start of a nasty bear market?
Optimistic observers of the U.S. economy are quick to point that even though “soft” data (like the University of Michigan’s consumer confidence survey) have been deteriorating, the “hard” data remain solid. The unemployment rate stood at just 4.1% in February and remains near multi-decade lows. Retail sales, after some weather-related weakness during the early part of the quarter, continue to grow at a modest pace, according to the Commerce Department.
Yet as the administration rolled out its comprehensive tariffs plan on April 2, it was clear that tariffs will have a negative economic impact in the short term. Households will most likely tighten their belts further and reduce discretionary spending. Companies, meanwhile, will need to reassess their capital spending plans.
The fate of the S&P 500 after a 10% correction will depend on how U.S. companies respond to tariffs. If the costs associated with tariffs on imported goods are deemed to be too high, companies across many industries will cut jobs to maintain profit margins. Rising unemployment may lead to a recession, which in turn could lead to another 10% decline in U.S. stock markets.
On the other hand, corporate adjustments to tariffs may prove to be “manageable.” If that’s the case, and the economy slows briefly without tipping into recession, then we can expect the S&P 500 Index to recover within six to nine months and reach new highs within 24 months, according to Bloomberg and Apollo studies of past corrections.
We will be paying close attention to the comments CEOs make during their first-quarter earnings calls this month. No doubt the key word will be tariff. Will companies maintain a positive outlook for sales and profitability for 2025 and beyond?
We suspect that we are at peak uncertainty and expect that clarity may emerge in the coming weeks.
Meanwhile, we will stick to our core investing principles:
Stay diversified: Unlike day traders and hedge funds, we don’t chase the latest fad or concentrate on a few stocks. Tesla stock, for example, declined 36% in the first quarter, while a well balanced portfolio composed of 60% high-quality equity and 40% fixed income investments was barely in negative territory (-2%) for the quarter, according to PortfoliosLab.
Stay invested for the long term: Market timing is incredibly difficult and can be a significant drag on portfolio performance. According to JP Morgan Asset Management, missing 10 of the best performing days in the market over the last 20 years would have cut your returns in half. Mr. Market does not ring a bell when it is about to turn!
Know what you own: The most difficult aspect of investing in a company is determining the difference between a temporary setback (a short-term impact from tariffs, for example) and an existential threat to the underlying business (remember Kodak?). This is the reason we constantly monitor our investment models and very rarely have an exposure greater than 4% on a single company – no matter how wonderful it might be.
As always, do not hesitate to contact us with any questions on the markets or a specific investment.
Thierry Hasse
Chief Investment Officer
April 3, 2025
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.