Periods of rising price volatility and several risk-on/risk-off trades occurred in the quarter as investors attempted to navigate the changing and clouded environment. In the end, global equity markets ended the quarter down, as the strength found in discounted European equities was not sufficient to overcome the sell-off in U.S. equities. The regional performance differences in the quarter highlight the benefit of global diversification, particularly in periods of global trade realignments.
U.S. large-cap equities had been the benefactor of a momentum trade driven by excitement around artificial intelligence, solid earnings growth, and a resilient economy. This was further sparked by anticipated pro-growth policies for the U.S. from President Trump. This trade, which some would say was priced for perfection, cracked in the first quarter of 2025 as tariff policy uncertainty clouded the outlook for corporate earnings and economic growth, as well as inflation and interest rates. At the same time, European equities, which traded at a discount to U.S. large-cap equities, attracted investor capital, driving up returns of European equities. In addition, fiscal spending plans in support of defense and infrastructure initiatives boosted the European equity trade.
With a heightened level of economic uncertainty and inflation near target levels, central banks, including the Bank of Canada, Bank of England, and the European Central Bank, lowered interest rates in the quarter. In contrast, the U.S. Federal Reserve made no change to its policy rate, citing continued economic expansion, stabilized low level unemployment rates, and solid labour market conditions. However, an increase in economic uncertainty was also acknowledged.
While global trade uncertainty has sparked concerns about economic growth, today’s moderate inflation environment provides central banks the flexibility to adjust monetary policy as needed, to address slowdowns in growth and support stability. In addition, governments can use fiscal policy initiatives such as infrastructure spending, to support their economies.
History has shown that markets are resilient, with each downturn followed by a recovery. However, attempting to time these shifts has proven to be a “fool’s errand,” which is why many investors remain invested through periods of market turmoil.
