Q1 2025 Review: Navigating Volatility
Market Commentary Quarter 1 2025
In the first quarter of 2025, global markets experienced heightened volatility driven by a mix of geopolitical tensions, ongoing uncertainty around US trade policies, and shifting expectations around central bank interest rate decisions.
During the first three months of 2025, global macroeconomic conditions shifted notably. US sentiment weakened amid policy uncertainty, while Germany’s fiscal reforms boosted the European outlook. In March, Germany approved looser borrowing rules under incoming Chancellor Merz, allowing defence spending exemptions and enabling a €500 billion infrastructure fund over 12 years. The European Central Bank cut interest rates by 25 basis points in both January and March. Meanwhile, annual inflation in the Eurozone eased to 2.3% in February from 2.5% in January. US Treasuries outperformed as recession fears grew, and divergence emerged in corporate bond markets, with US bonds leading. The US Federal Reserve (Fed) cut its growth forecast to 1.7% from 2.1%. The Fed also lifted its inflation outlook to 2.7% from 2.5% and kept interest rates on hold at 4.25-4.50% during the quarter. Japan faced rising yields on strong growth, while China’s deflationary pressures kept yields subdued.
Global equities delivered a mixed performance in the first quarter of 2025, shaped by divergent regional drivers and shifting investor sentiment. US stocks declined, mainly due to concerns over new trade tariffs and rising competition from China in artificial intelligence. These concerns particularly impacted the technology and consumer discretionary sectors, which had previously led market gains. However, other sectors fared better, with energy and healthcare emerging as the top performers. In contrast, European equities outperformed, supported by optimism around Germany’s newly announced fiscal stimulus and infrastructure plans. The shift also reflected a broader rotation away from US mega-cap tech stocks, as investors sought greater regional diversification. Sector rotation was also a notable theme, with banks and industrials leading gains in Europe. The UK market posted modest gains, with large-cap sectors such as financials and energy benefitting from global sector trends. Emerging markets also advanced, supported by strong performance in China, boosted by government stimulus and AI optimism. Conversely, Japan and other parts of Asia struggled due to trade worries and economic uncertainty.
Looking ahead, markets are expected to remain sensitive to policy developments and macroeconomic data releases in Q2 2025. Central bank guidance, the evolution of US trade negotiations, and the rollout of Germany’s fiscal programme will be key drivers of sentiment. While risks around inflation and geopolitical tensions persist, opportunities remain for selective growth across regions and sectors, particularly where policy support and structural themes, such as artificial intelligence and energy transition, continue to gain momentum.
Article Sources: Schroders Insights
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