Action-packed start to the year. Well, what can one say about a quarter in which the U.S. engaged in not one, but two, major military “excursions”? (And don’t forget our brief flirtation with Greenland). Add to that the DOJ pursuing charges against the Fed chair, a government shutdown, growing concerns about the stability of the private credit industry, and existential questions about software companies and the future of work as we know it—and it’s somewhat surprising that the S&P 500 was only down 4.3% in the quarter (though the numbers were buoyed by the last trading day of the quarter, when the S&P 500 had its best session in 10 months).
Where’s support? Though a negative quarter is nothing to celebrate, it could have been worse for a stock market trading at a high valuation (23x earnings) and coming off three years of strong performance. If there is good news, it’s that earnings were strong in the last quarter of 2025 (up 14.0% year over year). More importantly, earnings expectations are unscathed, with Wall Street analysts currently expecting S&P 500 earnings per share for the first quarter to be up 14.3% from a year ago.
Rates in focus. Long-term interest rates are critical to this balance. Over the last four years, we have found that the 4.50% level on the 10-year Treasury has been an important line in the sand for stock market performance; the higher yields have gone, the tougher sledding it’s been for stocks. The 10-year Treasury yield dipped to 3.94% in late February just before the war with Iran started, and rose as high as 4.43% in late March. The Treasury Department is skewing issuance to the short end of the yield curve in an attempt to manage the long-term rates so critical to long-duration assets like stocks (i.e., assets for which most of the payoff is expected far in the future).
Market dispersion. Judging by which sectors outperformed the S&P 500 in the quarter, investors appear to be hunkering down for a potential slowdown in economic activity due to the war in Iran. Commodity sectors like Energy and Utilities significantly outperformed pro-cyclical sectors like Technology, Consumer Discretionary, and Financials. High quality small-caps and Value outperformed large-cap Growth, perhaps due to concerns that problems in private credit will raise the cost of capital. Meanwhile, the market’s “it” stock of recent quarters, Nvidia, was down 6.5% despite another quarter of strong earnings for the company. This may reflect a shift in investor appetites.
This quarterly market update has been developed by Strategas, a Baird Company, and provided by Kimberly Austin, a Baird Financial Advisor serving the Sacramento Valley. For more information on Kimberly and the latest market insights, visit kaustin.bairdwealth.com.
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