March was a wild month for the markets, with stock prices experiencing significant volatility. The S&P 500 dropped by around 5.8%, and the tech-heavy Nasdaq Composite saw an even steeper decline of 8.2%. Things only got more intense in early April after President Trump’s announcement of “tariff liberation day,” which revealed unexpected and substantial tariff increases on global exports. This news caused a sharp downturn in the markets, with the S&P 500 falling 14% year-to-date by April 4, and the Nasdaq 100 dropping 17% over the same period.

Unlike the expected dominance of major players, the big technology stocks—often referred to as the “Mag 7″—have been among the biggest losers, down over 23% on average in 2025. Meanwhile, smaller, less flashy stocks, especially those in more defensive sectors like Utilities, Energy, and Healthcare, have held up better. These more modest sectors have experienced losses in the low single digits, reflecting a shift in market dynamics.

This year, U.S. stocks that have long led the global markets are being outperformed by international stocks. Developed-market international stocks, represented by the MSCI EAFE Index, are up 1% year-to-date, while the S&P 500 has experienced a 14% drop. Similarly, emerging markets have shown resilience, with the MSCI Emerging Markets Index also up 1% in dollar-denominated returns.

A Typical Year with Volatility

While the rough start to 2025 may have caught some off guard, it is not entirely unexpected. Earlier this year, we introduced our investment theme for 2025, “Clear Air Turbulence,” which anticipated short-term pullbacks of 10-15% before reaching our projected year-end target of 6600 for the S&P 500. This forecast assumed that the first half of the year would be volatile, with markets recovering in the latter half. While other firms turned optimistic after the presidential election, we were more cautious, recognizing that market valuations were already stretched.

The market’s price-to-earnings (P/E) ratio stood at 21.6 times forward earnings in early 2025, suggesting limited room for disappointment in economic data or political developments. Indeed, the current pullback is typical, as history has shown that intra-year corrections often precede strong year-end results. For instance, the market suffered a 34% drop in 2020 due to the pandemic, only to recover and finish the year with a 16% gain.

Surprising Tariff Announcements

What has truly shaken the markets recently, however, is the size of the tariffs announced on April 2. The $500 billion in new tariffs, combined with existing levies, brings the total to $650 billion—larger than the annual revenue generated by U.S. corporate taxes. This move pushes the average tariff rate from 2% to around 20%, a significant increase and much larger than economists had anticipated.

These tariff hikes have led many Wall Street strategists to increase the probability of a recession, with many revising their previous bullish forecasts for the S&P 500. In the first few days of April, the S&P 500 dropped nearly 10%, reflecting heightened investor concerns.

Economic Impact and the Path Forward

In the short term, these tariffs and the resulting uncertainty are expected to slow economic growth and increase inflation slightly. As a result, GDP growth and earnings forecasts are being revised downward. We’ve raised the odds of a recession to 40%, but we still expect the U.S. economy to show modest positive growth in 2025. However, the upside potential for the year has diminished, and the path to our original target of 6600 for the S&P 500 is now less likely.

Several factors could still support a market rebound:

• Successful trade negotiations could help de-escalate tensions and reduce investor anxiety.
• Congress could introduce a robust tax cut package, funded by tariff revenues, to stimulate growth.
• The Federal Reserve might intervene with interest rate cuts to support consumer spending and credit.

For now, the key is to avoid reacting impulsively to short-term fluctuations. Market volatility is expected to persist, but maintaining a long-term focus and avoiding knee-jerk reactions to headlines is critical.

How to Position Your Portfolio

Given the current volatility, what should investors do? Here are a few recommendations:

• Hold Your Ground on Equity Allocation: If you’ve been rebalancing your portfolio to maintain your long-term equity target, stick to your plan. If recent market movements have caused you to reconsider your allocation, it may be time to reassess whether your original target was too high. Consult with your wealth advisor to determine whether your long-term stock allocation is still appropriate.
• Be Mindful of Portfolio Imbalances: The market has seen extreme outperformance from a select group of stocks, particularly the Mag 7. If your portfolio is heavily weighted in these stocks or U.S. growth stocks, it may be time to trim those positions and consider adding international stocks, which are currently undervalued. International P/E ratios are attractive, and there are strong fundamental catalysts that could drive growth abroad.
• Consider Alternatives: Adding alternative investments that provide downside protection and have a low correlation with traditional asset classes can help balance your portfolio.

Final Thoughts

The market’s unpredictable nature has made 2025 a year of heightened volatility. While we expect modest gains for the rest of the year, it’s crucial to remain patient and avoid making emotional decisions. As we’ve seen in previous years, significant market downturns have often been followed by strong recoveries. Now is the time to focus on balance, diversification, and long-term goals, even as headlines continue to shift. By staying disciplined and avoiding premature action, you’ll be better positioned to navigate the turbulence ahead.