Market update: First quarter 2025

The first quarter of 2025 was challenging for financial markets. The year began moderately positive but uncertainty around U.S. trade policy had a major impact on global equity and bond markets. In Europe, announcements of large-scale government spending attracted attention, with implications for interest rate markets.

Review of first-quarter 2025: Concerns in the U.S. and a rebound in Europe.

The year 2025 got off to a surprising start. The unexpected launch of a powerful new AI chatbot by Chinese company DeepSeek on Jan. 10 immediately caused a stir within the technology, AI and chip sectors. This innovation called into question the supposed dominance of American technology companies, which rely heavily on high investment and high-end chips.

Although President Trump's inauguration initially provided some optimism, sentiment clearly turned in March due to the threat of new import tariffs from the US government.

On the contrary, Europe experienced an upturn. European Commission President Ursula von der Leyen announced plans for nearly 800 billion euros in defense spending. In addition, Friedrich Merz, the intended new German Chancellor, presented an ambitious infrastructure plan of 500 billion euros, complemented by increased defense spending. These investments are expected to stimulate the growth of European companies in various sectors. However, these plans also put pressure on the price of European government bonds due to financing through new borrowing. This led to lower bond prices and negative effects on funds investing in them.

Market correction in late March: US under pressure, European equities benefit

The quarter closed with a sharp correction, particularly noticeable in U.S. equities. The combination of uncertainty surrounding U.S. trade policy and doubts about U.S. superiority in AI, reinforced by the introduction of DeepSeek, created negative market sentiment. The exchange rate of the dollar against the euro fell some 5%, causing additional negative returns on U.S. investments measured in euros.

Capital partly flowed out of U.S. stocks toward European markets. This is due to the fact that for years, European stocks have had a better ratio of stock price to earnings of the underlying companies. U.S. stocks, on the other hand, more often consist, on average, of so-called growth stocks: companies with a higher valuation relative to their current earnings, based on the expectation of strong future growth. During periods of heightened uncertainty, these growth stocks tend to be hit harder because their expected growth has already been largely factored into the price.

The combination of capital flows into Europe and large-scale investment plans created optimism in Europe. Although this brought global equity markets slightly more into balance, the U.S. market share remains by far the largest. As a result, equity markets in Europe only partially managed to limit the global market decline.

Our advice: stick to your strategy

Despite the negative quarter, this period clearly shows the strength of a well-diversified portfolio. While U.S. equities lost returns, European equities compensated thanks to positive returns. That total returns were still negative is mainly due to the greater weighting of U.S. equities in global indices.

Our message therefore remains unchanged: don't be swayed by temporary market movements. The Vive investment model ensures that your portfolio is optimally composed to suit your risk profile.

Stay focused on your long-term goals

Don't let temporary market fluctuations throw you off balance. Keep your personal financial goals clearly in mind and adjust your portfolio only when your personal situation changes, not based on short-term movements. A broadly diversified strategy remains essential for long-term success.