Quarterly Review: After a Promising Start to the Year, Market Gains Fade
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After hitting record highs early in the year, the S&P 500 ended the quarter on a down note.
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The tech-heavy Nasdaq fell sharply amid concerns about new competition in the AI space.
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Value stocks outperformed growth stocks for the quarter, but small caps lagged large caps.
US stocks started the quarter up but finished on a down note, lagging their global counterparts amid uncertainty about the economy, competition in the AI space, and questions about the impact of tariffs under the new presidential administration. While the S&P 500 hit new highs early in the quarter, it was down for the year as of late March.1 After cutting interest rates a full percentage point last year, the US Federal Reserve held them steady. As the quarter neared an end, stocks in international developed markets and emerging markets were outpacing those in the US—a departure from recent trends and a reminder of the potential benefits of an internationally diversified portfolio. In the bond market, US Treasuries rose, sending the benchmark 10-year yield below 4.5%.2
The new presidential administration took office in the US, threatening or imposing tariffs on goods from countries including Canada, Mexico, and China, as well as from the European Union.3 The Fed kept the federal-funds rate unchanged in the 4.25%–4.5% range in March, citing elevated inflation and an uncertain economic outlook.4 On inflation, the US core consumer price index, which excludes more-volatile food and energy items, showed prices rose 3.1% from a year earlier in February, the most recent data available, which is more than a percentage point higher than the Fed’s target of 2%.5 Meanwhile, the unemployment rate edged slightly higher, to 4.1%, in February.6
Against this backdrop, US stocks declined, with the S&P 500 Index falling 3.3% and the tech-heavy Nasdaq losing 7.8% as of March 21. Both indices at one point had fallen more than 10% from their recent highs. In late January, NVIDIA and other AI-related stocks took a hit following news that a Chinese company, DeepSeek, developed an AI model with much less investment than some US companies developing AI tools.7 NVIDIA dropped nearly $600 billion in market value in one day, reinforcing that even high-flying companies can stumble when expectations change, a reason to be cautious about concentrating investments. Global equities, as measured by the MSCI All Country World Index, only rose 0.4%, weighed down by the US.8 Developed international stocks outperformed the US by rising 9.3%, as measured by the MSCI World ex USA Index. The MSCI Emerging Markets Index added 5.7%.
It was a mixed quarter for value, small cap, and high profitability stocks. Value stocks, or those with low relative prices, outperformed growth stocks for the quarter through late March. But over that same period, the stocks of small cap companies lagged large caps. And high profitability stocks were outpaced by low profitability stocks in both developed and emerging markets as of the end of February, the most recent data available.9
The bond market was higher, with US prices up slightly overall, as measured by the Bloomberg US Aggregate Bond Index, which gained 2.6% as of March 21. The benchmark 10-year US Treasury also gained, sending its yield down to 4.25%.10 Likewise, global bonds rose, with the Bloomberg Global Aggregate Bond Index (hedged to USD)—a broad benchmark of sovereign and corporate debt—up 0.9% as of March 21.
Tariff Trepidation
The threat of tariffs is liable to loom over markets for the foreseeable future, with levies on China already in place and those on Canada and Mexico set to take effect in early April. However, markets in these target countries are up for the year, while the US is down (see Exhibit 1). But there’s no assurance as to what the results of any coming actions will be. During President Donald Trump’s first term in office, both China and the US posted higher returns than the MSCI World ex USA index despite the tariff activity that was a backdrop.
Performance Review
Index returns in local currency, year-to-date as of March 21, 2025
Past performance is not a guarantee of future results.
For those wondering about the potential impact on markets of tariffs, it’s worth remembering that effects can be hard to predict and that current market prices reflect investors’ best and most current expectations of tariffs’ impact. Knowing—much less speculating—where and when tariffs will be imposed may not help investors predict which markets will outperform.
Keeping Volatility in View
The increase in market volatility during the first quarter is also a reminder for investors to expect ups and downs. While sharp declines may be disappointing, they shouldn’t be surprising. As Dimensional Founder and Chairman David Booth writes, “reacting emotionally to recent market volatility may be more detrimental to portfolio performance than the drawdown itself.” So instead of getting anxious over a near-term drop, investors would be better served by keeping an eye on the horizon and staying focused on their long-term goals.
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index descriptions
Fama/French Developed High Profitability Index: July 1990–Present: Fama/French Developed High Profitability Index. Courtesy of Fama/French from Bloomberg securities data. Includes stocks in the upper 30% operating profitability range in each region; companies weighted by float-adjusted market cap; rebalanced annually in June. OP for June of year t is annual revenues minus cost of goods sold; interest expense; and selling, general, and administrative expenses; divided by book equity for the last fiscal year end in t – 1. Fama/French and multifactor data provided by Fama/French.
Fama/French Developed Low Profitability Index: July 1990–Present: Fama/French Developed Low Profitability Index. Courtesy of Fama/French from Bloomberg securities data. Includes stocks in the lower 30% operating profitability range in each region; companies weighted by float-adjusted market cap; rebalanced annually in June. OP for June of year t is annual revenues minus cost of goods sold; interest expense; and selling, general, and administrative expenses; divided by book equity for the last fiscal year end in t – 1. Fama/French and multifactor data provided by Fama/French.
Fama/French Emerging Markets High Profitability Index: July 1991–Present: Fama/French Emerging Markets High Profitability Index. Courtesy of Fama/French from Bloomberg and IFC securities data. Includes stocks in the upper 30% operating profitability range in each country; companies weighted by float-adjusted market cap; rebalanced annually in June. OP for June of year t is annual revenues minus cost of goods sold; interest expense; and selling, general, and administrative expenses; divided by book equity for the last fiscal year end in t – 1. Fama/French and multifactor data provided by Fama/French.
Fama/French Emerging Markets Low Profitability Index: July 1991–Present: Fama/French Emerging Markets Low Profitability Index. Courtesy of Fama/French from Bloomberg and IFC securities data. Includes stocks in the lower 30% operating profitability range in each country; companies weighted by float-adjusted market cap; rebalanced annually in June. OP for June of year t is annual revenues minus cost of goods sold; interest expense; and selling, general, and administrative expenses; divided by book equity for the last fiscal year end in t – 1. Fama/French and multifactor data provided by Fama/French.
Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
Footnotes
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1. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Data as of March 21. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
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2. Returns based on the Bloomberg US Treasury Bond Index as of March 21. Bloomberg data provided by Bloomberg Finance LP. Source for US Treasuries: US Department of the Treasury.
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3. Ana Swanson and Jeanna Smialek, “Trump’s Tariffs on Steel and Aluminum Go Into Effect,” The New York Times, March 12, 2025.
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4. The federal-funds rate is the overnight interest rate at which one depository institution (like a bank) lends to another institution some of its funds that are held at the Federal Reserve. “Federal Reserve Issues FOMC Statement,” Federal Reserve, March 19, 2025.
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5. Inflation data as defined by the consumer price index (CPI) from the US Bureau of Labor Statistics; the core CPI is an aggregate of prices paid by urban consumers for a typical basket of goods that excludes food and energy; Megan Leonhardt, “Markets Celebrate Softer Inflation, but Fed Will Remain on Pause,” Barron’s, March 12, 2025.
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6. Derek Saul, “US Added 151,000 Jobs as Unemployment Rose to 4.1% in February,” Forbes, March 7, 2025.
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7. George Glover, “DeepSeek Spooks the Stock Market. Why China’s AI Model Is a Big Concern for US Tech,” Barron’s, January 27, 2025.
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8. MSCI data © MSCI 2025, all rights reserved. Data as of March 21. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
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9. The MSCI All Country World Value Index rose 5.1%, while the MSCI All Country World Growth Index lost 3.9% as of March 21; the MSCI All Country World Small Cap Index lost 1.8%, while the larger-cap MSCI All Country World Index rose 0.4% as of March 21; the Fama/French Developed High Profitability Index rose 2.8% vs. 3.8% for its low profitability counterpart as of February 28; the Fama/French Emerging Markets High Profitability Index fell 0.8%, and its low profitability counterpart fell 0.7% as of February 28. See “Index Descriptions” for descriptions of the Fama/French index data.
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10. “Daily Treasury Par Yield Curve Rates,” US Department of the Treasury. Data as of March 21.
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