Uncertainty over tariffs and a sharp downturn in Magnificent Seven stocks pressured the U.S. stock market in the first quarter and caused most domestic stock funds to suffer losses.
Fears of a trade war intensified in March after President Donald Trump slapped a 25% tariff on steel and aluminum imports. He also warned of a 25% levy on foreign-made autos, as well as tariffs on some goods from China, Canada and Mexico.
A protracted global trade war is seen weighing on economic growth and reigniting inflation. Many Wall Street firms have upped the odds of recession due to tariff fallout.
Trump Tariffs Disrupt The Stock Market
On April 2, Trump followed through on his threat of reciprocal tariffs, exacerbating market turbulence. The president announced a baseline 10% tariff on all countries that takes effect April 5. And higher levies on countries in which the U.S. has a large trade deficit go into effect April 9.
The auto tariffs kicked in on Thursday. Wall Street is anticipating retaliation from U.S. trading partners, although some view the Trump tariffs as a negotiating tactic. But investors should expect continued volatility, says Mary Ann Bartels, chief investment strategist at Sanctuary Wealth. "This was the worst case scenario for tariffs and (they) were not priced into the markets," said Bartels. "We're expecting rocky markets for the next few months."
The damage to fund investors was widespread in the final month of the first quarter. Growth stocks, large and small, took a big hit and the hot artificial intelligence (AI) trade cooled off.
The average U.S. diversified equity fund cratered 5.72% on a total return basis in March — and was down 5.11% in the first quarter, according to Lipper Refinitiv.
Magnificent Seven Feel The Stock Market Pain
Much of the pain was caused by a sizable correction in Magnificent Seven stocks Amazon, Apple, Meta, Microsoft, Nvidia, Alphabet and Tesla.
The group of megacap stocks fell 15.8% in Q1, according to S&P Dow Jones Indices. "They were all in the red," said Howard Silverblatt, senior index analyst at S&P. The S&P 500 fell 4.27% in the first quarter but would be up 0.5% if the Magnificent Seven losses were backed out, Silverblatt says. It was the S&P 500's biggest quarterly decline since 2022, according to Deutsche Bank.
Technology stocks suffered the largest declines. The tech-loaded Nasdaq composite slumped 8.14% in March and 10.26% in the quarter, Lipper data shows. Science and technology funds were the worst-performing sector funds, slumping 9.8% in March, leaving them down 11.58% for the first quarter.
Deutsche Bank dubbed the tech wreck "the end of U.S. 'techceptionalism.'"
Trouble For ETFs
In ETF land, most of the worst-performing funds had tech or cloud computing or semiconductors or AI in their names. Examples include Roundhill Magnificent Seven ETF, down 15.73% in the first quarter, and VanEck Fabless Semiconductor ETF, which has fallen 20.2%.
"The Mag Seven, which had driven equity market returns over the past two years, has now become the Lag Seven," said Ryan Grabinski, investment strategist at Strategas, a Wall Street research firm.
S&P 500 index funds, on the large-cap market-cap weighted index whose top holdings include the Magnificent Seven, fell 5.67% in March and are down 4.38% through the end of March. The benchmark index, which fell 5.63% in March, had its worst month since September 2022. Large-cap growth funds fell 8.47% in March and 9.26% in the first quarter. Invesco QQQ Trust, which tracks the 100 largest nonfinancial stocks in the Nasdaq, was down 8.11% in the quarter.
Big Problems For Small Stocks In The Stock Market
Small stocks didn't escape the downdraft either. Small-cap growth funds fell 10.55% in the first quarter. And small-cap value funds lost 7.51% in the year's first three months. Aegis Value (AVALX) bucked the losing trend, rising 7.66% in March and 11.66% for the quarter.
If there was a bright spot in the first three months of 2025, it is that portfolio diversification worked. Mutual fund and ETF investors with holdings in value stocks, dividend-paying equities, so-called defensive stocks, plus fixed income and foreign stocks saw gains in these areas. And that offset some pain.
Large-cap value funds, for example, finished the first quarter up 1.05%. Hennessy Cornerstone Value Fund (HFCVX) was the top performer in the first quarter, rising 9.19%, according to Lipper. In a sign of the big divide between growth and value last quarter, Vanguard Value Index ETF posted a 2.63% gain in the first quarter, while Vanguard Growth Index ETF declined 9.53%, according to Morningstar.
Equity income funds, which invest in stocks that pay and grow their dividends, ended the quarter up 0.96%. Utility funds and consumer goods funds are viewed as defensive in nature. Their products are needed no matter how the economy fares. These funds ended the first quarter up 4.09% and 2.15%, respectively.
Dividends Are In Again
A handful of dividend-focused ETFs populated the top-20 best-performing Diversified Stocks ETF list. First Trust Morningstar Dividend Leaders gained 8.8% in the first quarter, ranking it second best behind YieldMax Gold Miners Opportunity Income Strategy ETF, which is up 27.02% through the end of March. iShares Core High Dividend ETF gained 8.61% in the first quarter.
The bond market offered ballast, too. All 15 Lipper fixed income mutual fund indices finished in the green in the first quarter. Falling bond yields and rising bond prices provided a lift. The 10-year Treasury note declined 37 basis points in the first quarter to 4.21%. That powered Schwab Long-Term Treasury ETF to a first-quarter gain of 5%.
IShares Core US Aggregate Bond, which invests in a diversified basket of investment grade bonds, eked out a 0.03% gain last month and sported a solid 2.74% gain at the end of the quarter, Morningstar data shows. Vanguard Total Bond ETF, which invests in all U.S. bonds, finished the first quarter 2.78% higher.
Making Europe Great Again
World equity funds were up 3.31% in the first quarter. The big winners were European region funds. They got a boost from a big increase in defense spending in countries like Germany. Global X DAX German ETF gained 2.95% in March to extend its year-to-date gain through the end of March to 17.35%, according to Morningstar Direct.
In an example of the outperformance of foreign vs. U.S., iShares Core MSCI EAFE ETF gained 7.64% in the first quarter, outpacing the U.S.-focused Vanguard S&P 500 ETF by almost 12 percentage points.
European stock funds rose 9.84% in the first quarter. On the ETF side, Select STOXX Europe Aerospace & Defense ETF gained 8.41% in March and 37.4% for the quarter, making it the top-performing ETF of the year.
Oberweis Focused International Growth (OFIGX) was up 13.86% in the first quarter. That ranked it No. 1 in international large-cap growth funds, says Lipper. Fidelity Series International Value's (FINVX) 14.01% gain in the quarter led the international large-cap value funds category.
What's Up For The Stock Market In The Rest Of The Year
But the first quarter is old news. And Wall Street is now waiting to see what the aftershocks of Trump's tariffs will be.
"It's the unknown unknowns that can lead to severe confidence shocks — shocks that shift goals from generating (market-beating returns) to staying liquid and getting to the other side," said Savita Subramanian, equity and quantitative strategist at Bank of America Securities.
If stagflation (slowing growth plus rising inflation) becomes a risk, you should expect a shift in the stock market. Companies helped by inflation and higher rates who have less global exposure, stable earnings and dividends "may be the safer route," Subramanian says. An investment play Subramanian likes now, as a result, is large-cap value.
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