As we move through the early months of 2025, the S&P 500 has presented investors with an unfamiliar narrative compared to the strong performance seen in 2023 and 2024. After two consecutive years of returns exceeding 25%, Q1 delivered a pullback—reminding us that markets don’t rise in a straight line.

A Rough Quarter for Growth and Small Caps

In Q1 2025, the S&P 500 declined by over 4%, with small-cap stocks and large-cap growth leading the downside—both dropping more than 9%¹. In contrast, large value stocks and REITs delivered modest positive returns, highlighting the benefits of diversification across equity styles and sectors.

Volatility Returns to the Forefront

Our next view into market behavior comes from analyzing the S&P 500 price levels alongside the CBOE Volatility Index (VIX). Historically, when the VIX spikes above 25, it tends to align with market drawdowns. These periods of heightened volatility, though often short-lived, can cause significant investor concern. Q1 was no exception, as policy uncertainty—particularly surrounding new tariff announcements—sent jitters through the market.

Tariffs Trigger Swings in Market Sentiment

One of the quarter’s most striking developments came in early April. On April 3rd, the announcement of new tariffs triggered a market drop that ranked as the 34th largest one-day decline since 1950. Just six days later, the market rebounded sharply after news of a 90-day tariff pause, marking the third largest one-day gain on record.²

How Does 2025 Stack Up Historically?

To put Q1 into context, we reviewed S&P 500 performance during the first 70 trading days of each year going back to 1950. The data shows that 2025 ranks as the fourth worst start, trailing only 2020 (impacted by the onset of COVID-19) and two years from the Great Depression era.³

While that may sound ominous, there’s a silver lining: in each of the top three years on that list, markets delivered positive returns for the remainder of the year. Only 2020 managed to fully recover and finish the year in the green. Whether 2025 will follow that trajectory remains to be seen.

Final Thoughts

Markets don’t move in straight lines, and after two years of exceptional performance, Q1 2025 has served as a reset. Volatility and policy-driven market swings have created short-term uncertainty, but long-term investors would do well to stay the course and maintain diversified exposure.

Have questions about what this means for your strategy? Connect with your advisor or contact our team directly.

Sources
1. Standard & Poor’s, FTSE Russell, YCharts. Data as of 3/31/2025
2. YCharts. The VIX measures the implied expected volatility of the US stock market and is calculated using futures contracts on the S&p 500. Data as of 4/8/2025
3. Morningstar, YCharts. Data as of 4/9/2025