The stock market declined in the first quarter after two consecutive years of gains exceeding 20%. The year started off strongly, with the S&P 500 reaching a new all-time high in mid-February. However, sentiment shifted late in February amid rising policy uncertainty in Washington, and the S&P 500 ended the quarter down.

Days after the quarter ended, President Trump announced tariff measures that caught investors off guard, leading to additional market declines. There are many moving pieces and much uncertainty in the markets, and we will share our perspective in this commentary. We will also address the increase in market volatility and emphasize the importance of maintaining your investment strategy.

Stocks Trade Lower as Valuations Moderate

Equities declined during the first quarter, as rising policy uncertainty weighed on investor sentiment. There was a clear shift from optimism to pessimism, which contributed to valuation compression and lower equity prices.

During the quarter, Wall Street analysts lowered their earnings forecasts, citing the potential for tariffs and slower growth. Meanwhile, the S&P 500’s P/E ratio declined from over 22x to approximately 20x. The valuation decline may seem modest, but it had a meaningful effect on returns.

Those falling valuations were the primary driver of the selloff as sentiment weakened. Investors started to price stocks more conservatively due to concerns about tariffs, slower economic growth, and policy uncertainty. Stock valuations tend to expand when earnings are growing, but the inverse is also true.

Market leadership shifted in the first quarter as last year’s top performers lost momentum. Last year, the Magnificent 7, a group of leading tech stocks, helped fuel 2024’s strong returns. The group’s strength lifted the broader market, with the S&P 500 gaining 23%. In contrast, the equal-weight S&P 500, which gives all companies the same weight regardless of size, gained only 11%.

This year, the dynamics have flipped. Instead of lifting the market, the biggest stocks are now leading the decline. The Magnificent 7 declined 15% in the first quarter, while the equal-weight S&P 500 is down 1%.

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