Investors stepped into 2025 optimistic about the outlook for U.S. stocks. They had experienced two consecutive years of 20% plus returns. A select group of large companies, positioned to capitalize on the growth of artificial intelligence, were leading the charge. The Trump Administration was advocating pro-growth business-friendly policies. Meanwhile, the financial media was filled with recommendations favoring U.S. stocks over other investment options. Let’s look at how the year has unfolded and explore key factors to consider as we navigate the current market landscape.
Markets Have a Way of Surprising Investors
Recently, the Trump administration’s rapid policy changes and government downsizing have put investors on edge. Unpredictable decisions have created uncertainty and confusion. This has made it hard for businesses to plan. Consumer confidence is waning, and fears of a potential recession have re-emerged. Meanwhile, the Trump administration has warned that the economy “may see some disruption” as it goes through a “detox” period.
U.S. Stocks Lag Behind Other Asset Classes
Ironically, as the chart below shows, “America First” policies have put U.S. stocks at the bottom of the year-to-date performance ranking. After two years of narrow performance driven primarily by the largest U.S. companies, the market has shifted with other asset classes now seeing stronger returns. Diversification has re-surfaced as a key principle of investment success. Despite turbulence in the U.S. stock market, our diversified portfolios include assets that are holding up well and helping to stabilize overall returns.
As of March 14, 2025
European Markets Have Been Strong
This year, Europe has taken the lead in global stock market performance. This has surprised investors who assumed that “America-First” policies would harm international stock markets. The shift in U.S. leadership is driving changes abroad, particularly in Europe. European countries have boosted military budgets and have increased their tolerance for spending. This could unlock growth and help overcome economic stagnation. Structural change is also afoot. Friedrich Merz, Germany’s Chancellor-in-waiting, has outlined ambitious plans increase competitiveness. His approach emphasizes deregulation, tax cuts for businesses and a focus on driving growth through innovation. German budget flexibility may encourage similar efforts elsewhere. Furthermore, the deteriorating relationship with the United States may serve as a catalyst to foster greater unity within Europe.
Evaluating Change Through the Lens of the Capital Markets
The Trump Administration’s actions and rhetoric have fueled market volatility and strong emotions. Supporters of the administration view these changes positively, while others feel heightened anxiety. Our investment team’s goal is to remain objective and focused on the capital markets. By analyzing these changes through this lens, we can provide the best guidance for you and help navigate uncertainty.
We remain mindful of the risks posed by trade wars, tariffs, and the rapid downsizing of government. These changes could possibly lead to higher inflation, slower economic growth, or stagflation – a mix of both. However, it is important to recognize that the capital markets might respond favorably to other changes. Deregulation and lower corporate taxes could benefit businesses. Spending cuts might help address the long-term threat of rising debt, which poses a long-term risk to economic stability.
The Four New Year’s Resolutions That Remain Relevant
In January, we shared a video outlining four New Year’s resolutions to help navigate the changing environment. They remain just as relevant today.
- Stay disciplined, dispassionate, and focused on the long-term
- Don’t believe everything you hear
- Broaden your investment horizons
- Don’t let the tax tail wag the dog
Despite the uncertainty, our 10–15-year capital market forecasts remain unchanged. We expect U.S. equity returns to be positive, though lower than those of the past decade. The good news is that we anticipate 8 of 12 asset classes will generate higher returns than they did in the previous 10 years. Staying disciplined and focused on the long-term outlook is crucial. Our long-term capital market forecasts are aligned with the planning horizons of our clients. We see them as a compass to help guide you through periods of market turbulence.
President Trump is a deal maker who takes bold, combative stances during negotiations. We should be cautious about taking his statements at face value. He often scales back his threats when others make concessions. If the economy or markets weaken further, particularly as the 2026 mid-term elections approach, he may need to temper his actions.
This year, expanding investment horizons beyond the largest U.S. stocks has proven beneficial, and we expect this trend to persist. After several years of strong returns, it will be important to realize capital gains as we adjust in response to the evolving environment.
We encourage you to contact your wealth management team if you have any questions or would like to review your investments or financial plan.
Enjoy the mud season!
Douglas B. Phillips, CFA
Chief Investment Officer
douglas.phillips@ledyard.bank