Q1 2025 Market Review and Current Outlook

Executive Summary

• First Quarter Review: Post-election market optimism faded due to a combination of factors, including the release of DeepSeek’s cost-effective R1 AI model in January, triggering a sell-off in large tech names, though the S&P 500 briefly hit a new high in February. Rising fears that new tariff policies will lead to slowing economic growth and reaccelerated inflation prompting a new round of profit-taking in high-performing sectors and a shift to defensive assets (Consumer Staples, Health Care, Treasuries) and international markets (Europe, China) in the second half of the quarter.
• Strategy Performance Highlights: AIQ’s strategies faced headwinds from the sentiment shift, underperforming due to their preference for quality growth stocks and the underweight positioning in international markets. Fixed income performance was mixed as the shorter duration profile (less interest rate risk) was a headwind given the strength in U.S. Treasuries, but the more conservative positioning from a risk standpoint was a positive.
• Markets Are Volatile: Recent events, including the “Liberation Day” selloff, escalating trade tensions with China and the EU, rising long-term interest rates (i.e., declines in U.S. Treasury prices), wider credit spreads (i.e., signs of increased credit risk), and negative economic revisions in the U.S., have fueled increased volatility (VIX spiked) with markets often trading on headlines and social media posts.
• But Have Stabilized: Markets have, however, rallied off their lows after President Trump softened his tariff stance (90-day pause, exemptions) and backed off his criticism of the Fed Chairman. Subsequent dovish FOMC comments regarding a potential June rate cut added to the relief rally.
• Risks Remain: Early Q1 earnings reports reveal reduced business visibility, which likely foreshadows lower spending. When combined with declining consumer confidence, government spending cuts by DOGE, and retaliatory foreign tariffs, it is reasonable to assume that domestic GDP will be under pressure for at least the next few months. The tariff situation also remains very fluid with no deals actually signed as of yet and the significant details likely to take several months to settle. Given this backdrop, estimates could be at risk, which could cause further market declines, especially given still elevated valuations.
• Fixed Income: Interest rates remain volatile, but within our targeted range, so we maintain a conservative stance toward both interest rate and credit risk at this juncture. Risks include a potential (but highly unlikely) US debt limit breach this summer/fall, waning foreign confidence in Treasuries (20% foreign-owned, 10% of that by China), and tariff-driven inflation. Expected Fed rate cuts in June/July may steepen the yield curve with lower short-term rates and steady longer-term rates.
• Strategy and Conclusion: Focus on quality growth companies, increased international exposure, less correlated assets (managed futures, structured notes), and protective puts to navigate volatility and muted equity returns. Expect rates to be higher for longer due to inflation fears but lower short-term rates by year-end. Fixed income strategy prioritizes shorter duration and higher quality, with active monitoring of economic data and readiness to adapt to unforeseen developments.