Executive Summary

Macroeconomic Backdrop Entering 2025

Entering 2025, the global economy seemed on solid footing led by very strong fundamentals in the US, stabilization and rebound in Europe, further stimulus coupled with greater pro-business policy implementation in China, and continued progress towards disinflation globally.  

Analysts were optimistic about S&P 500 earnings growth, with earnings projected to grow 13% over 2024 levels.  US investors were optimistic regarding President Trump’s election, focusing on his pro-business policies with regards to less regulation and potentially lower tax rates.  Importantly, US investors seemed to view Trump’s tariff threats as negotiation posturing rather than ideologically driven.

Underlying these benign conditions, however, are trends in the global economy that have existed for decades and in some cases, have accelerated in recent years.  

These include:

• Globalization which has led to the US share of global GDP declining from 40% in the 1960s to about 25% today as China and other emerging markets gained economic strength.
• High US consumption, supported by relatively low US personal savings rates, leading to increased demand for imports.
• Persistent shift in the US towards a services-based economy and away from manufacturing, leading to significant share loss for manufacturing jobs and rising income and wealth inequality.
• A decoupling between the S&P 500, which increasingly consists of asset-light, high-margin, and strong cash flow generating companies, and the real economy (“Main Street”), with large gains in the S&P 500 further exacerbating US inequality.
• High and rising government deficits (current deficit of 6% of GDP is unprecedented during expansionary times), helping propel the US economy.
• Enhanced status of the US as a safe haven status globally given its relatively stable governmental policies, free market orientation, and military strength (actual and implied protection afforded to other countries), and relatedly, the USD’s position as the global reserve currency with foreign countries investing excess savings into US financial assets.  

The two most important: (1) US fiscal deficits (and resulting US public debt load), and (2) US trade deficits and China trade surpluses.  It is not clear that these two imbalances interrelate, although there may be some linkage.  

Furthermore, we can debate whether these imbalances can continue at current levels or even widen in the future without having negative effects on equity markets. 

However, it is clear that these deficits increase the risk of geopolitical or monetary shocks that may be extremely disruptive and difficult to manage.

The Trump administration seems intent on swiftly addressing global imbalances on its own terms, especially with regards to global trade.  President Trump views tariffs as the primary tool to lower persistent US trade deficit for goods. 

He believes that he can strike deals with countries that will achieve the following:

• Increase US tariff revenues from imported goods.   This revenue increase can offset other populist policies such as individual tax cuts.
• Increase US exports as Trump believes the combination of other countries’ tariffs, regulations, and currency markets have impeded US manufacturers from exporting their fair share of goods.
• Incentivize reshoring of US manufacturing.

US Tariff Policy (Liberation Day Announcement) 

During Q1, tariff-related uncertainty had already started to rear its head.  President Trump announced tariffs on certain Canadian and Mexican goods (in an on-again, off-again fashion) as penalties for those countries’ lack of effectiveness in border control and combatting fentanyl smuggling, implemented a 25% tariff on all aluminum and steel imports, and increased tariffs on China to 20% effective rates.   Equity markets generally absorbed these announcements with the MSCI ACWI Index down 1.3% during Q1.

However, on April 2, 2025, President Trump announced the “Liberation Day” trade initiative—a sweeping and highly consequential shift in U.S. trade policy. The initiative introduced a minimum 10% tariff on all imported goods from every country,

alongside a series of country-specific tariffs tied to the level of US trade deficit and targeting over 60 nations with rates as high as 50%.
These actions represent the most aggressive U.S. tariff regime since the 1940s.  If fully enacted, the effective average tariff rate on all US imports would climb to 25.3% from 2.7% entering the year. 

Tariffs proposed included:

• A universal baseline tariff of 10% on all imports
• A further 34% tariff on Chinese imports (bringing the effective rate on Chinese imports to 54%, effective April 9th)
• Tariffs ranging from 10%-50% for many countries with Southeast Asian countries hit especially hard (46% rate for Vietnam, 32% for Taiwan, 26% for India, and 25% for South Korea)
• Continuation of prior actions including a 25% tariff on many Canadian and Mexican imports (April 2), a 25% tariff on steel and aluminum imports (March 12), and a 25% tariff on finished autos and certain car parts. 
• Further tariffs aimed at specific sectors such as pharmaceuticals, copper, and semiconductors may be forthcoming.

The Liberation Day tariffs were originally framed as reciprocal in nature.  However, the magnitude of the tariffs was significantly higher than that justified by implementing purely reciprocal tariffs.  Rather, it became clear that the Trump administration’s focus is aimed at reducing US trade deficits in goods and reshaping the global economic order. 

The administration views trade deficit reduction as a key lever to bring back manufacturing jobs to the US and tariffs as the tool to do so while increasing revenues that can be utilized to fund tax cuts.

Globally, countries’ response to these tariffs have varied significantly.

Over the past week through April 11th, the US and China have significantly escalated the trade war.   The US has raised the effective tariff on Chinese imports to 145% while China has raised their tariffs on US imports to 125%.  Neither side has initiated negotiations, thus far.  

The EU prefers to negotiate but has prepared countermeasures including raising tariff rates on US goods and services.

Most other countries are engaging in negotiations including Japan, Korea, India, Vietnam and several others.

This seismic change in US trade policy has created considerable economic uncertainty and has raised the potential for a global recession if trade deals are not struck quickly.  

Equity and credit markets plunged in the four trading days post the Liberation Day announcement, and even the Treasury market exhibited unusual behavior, with long-term bond yields sharply spiking from April 8th through 11th after initially falling, as expected, for several days due to growth concerns.     

• Under immense pressure from business leaders and the bond market, Trump announced a 90-day pause in reciprocal tariffs for all countries except China beyond the universal 10% rate less than a day after they took effect.   Countries will likely negotiate the outlines of trade deals with the US over the next 90 days.
• Trump further temporarily exempted companies importing certain electronics (phones, computers, chips), including imports from China.
• With the current tariffs on China coupled with the 10% base tariff rate on other countries, the US effective tariff rate is roughly 20%.

While equity markets sharply rallied by more than 10% from their April 7th intra-day lows, the S&P 500 still remains 5.4% below April 2nd pre Liberation Day levels. 

Equity Markets

Global equities, as measured by the ACWI Index in USD, declined 1.3% in Q1 and 5.6% YTD through April 11th .  In Q1, US large-cap stocks (-4.4%) underperformed international developed (+6.9%) and emerging market (+2.9%) equities.   

US market weakness was driven by pullbacks in the AI trade as investors responded negatively to significant planned capex increases for several technology behemoths coupled with fears regarding cheaper AI models being developed in China (DeepSeek).  Uncertainty regarding potential US tariff policy, coupled with a chaotic implementation of federal workforce downsizing, also contributed to US equity market weakness.  International developed markets strength was driven by Europe’s (primarily Germany) pivot towards significant planned fiscal spending increases to bolster defense and infrastructure needs. 

Currency movements also materially contributed to Q1 returns in USD terms.  Emerging market strength was primarily driven by China’s embrace of material stimulus targeted at increasing domestic consumption coupled with a pivot towards pro-business policies after several years of regulatory crackdowns.  

Since Q1 end, equity markets initially tumbled following President Trump’s April 2nd “Liberation Day” tariff and trade policy announcement, although they have rallied substantially following his abrupt turn around and implementation of a 90-day pause on most reciprocal tariffs except for those facing China.   

Global stocks have declined 4.4% since quarter-end, with all major regions down by similar levels.  The S&P 500 declined by almost 10% in two trading days alone!   Following Trump’s 90-day tariff pause, global markets rallied substantially with one-day gains of 5%-10%.  

Volatility has reached extreme levels not seen since the GFC.  YTD, the ACWI Index is down 5.6%, with the S&P 500 down 8.6%, international developed equities up 2.4%, and emerging markets down 2.2%.  The USD weakened by 5%-10% vs. major currencies since the end of February, which has augmented international equities’ returns in USD.     

Government Bonds & Investment Credit

U.S. government and investment-grade corporate bonds appreciated in Q1 as bond yields declined sharply, reflecting rising concerns regarding slowing economic growth driven by slowing consumer spending and potential employment weakness, especially across the Federal government and contractor landscape. The Barclays US Aggregate Index appreciated 2.9% during Q1, with US Treasuries up 2.9% and corporate investment grade bonds up 2.3%.    

US Treasuries have behaved strangely since the Liberation Day announcement.  Initially, long-term (10-year and 30-year) maturities swiftly declined 20bps-30bps, which was expected, given higher recession probabilities.   However, over the next four trading days, these bond yields climbed by a staggering 70bps!

• Possible explanations include hedge fund unwinding of levered basis trades (trades involving futures vs. cash bonds arbitrage trades), as well as possible foreign investor (possibly China) selling.  The latter appears less likely as foreign investor demand for Treasuries at recent auctions remains robust.
• The Fed is closely watching bond market liquidity and other conditions and has indicated willingness to step in should conditions deteriorate.
• Given the self-inflicted tariff turmoil facing the US, investors are questioning whether the US will continue to hold its safe-haven status globally. 

YTD, the Barclays AGG remains up 1.1% with US Treasuries up 1.6% and corporate IG bonds down 0.2%.   IG bonds declined since the quarter end as spreads widened by 20bps. 

High-Yield Bonds & Leveraged Loans

US high-yield bonds were up 1.0% in Q1 as the benefit from high coupon yields and declining base rates was partially offset by widening credit spreads.  

Leveraged loans were up 0.5% as high coupon rates were offset by spread widening. 
Since Q1 end, high-yield bonds and leveraged loans have declined 2.4% and 1.4% respectively as spreads have risen quickly (but remain well below levels seen during recessions) driven by concerns of US economic slowdown post the Liberation Day tariff policy announcement.    Reflecting these declines, riskier credit is down about 0.9% to 1.4% YTD.

Hedge Funds

Hedge funds were up 0.5% in Q1, with mixed performance across strategies.  Event-driven (+1.0%) and convertible arbitrage strategies (+0.7%) performed best, while macro / trend following (-0.8%) and credit (-0.6%) strategies performed worst. 

Private Equity

Preliminary data indicates that private equity returns rose 1.0% in Q4 and were up 7.0% in 2024 (latest data due to lagged reporting). Returns in 2024 lagged public equities, largely due to lower exposure to AI and tech sectors.  Additionally, PE managers have been reluctant to mark up asset valuations during a period of still low exit activity.  

US PE new deal activity rebounded strongly in Q1 to $250bln (up from $185bln in Q4 2024).  Entry valuations have remained stable in the low-to-mid 12x EBITDA range (above 2023 trough levels and below the 14x 2021 peaks) while leverage has remained in the low-5x Debt / EBITDA range or roughly 45% of deal value.  Rising economic uncertainty, especially with regard to tariffs, may temporarily constrain deal activity in future quarters.   With $1 trillion in dry powder, PE firms are well positioned to capitalize on opportunities presented by potential market dislocations.    

US PE exit activity continued to improve during Q1.  At $187bln, exit activity was 45% higher than during Q4 2024 (although this was boosted by the $58bln Venture Global LNG IPO, and flat excluding that transaction).  However, exit deal count remains low, with only higher-quality portfolio companies exiting in this environment.  

US PE company inventory has swelled to 12,379 companies during Q1, which represents a 7-8-year inventory at the observed pace of exits in 2024 Improvement in exit activity must be sustained for the recovery to broaden to lower quality assets.    

Private Credit

Private Credit (measured by the Cliffwater Direct Lending Index) was up 2.8% during Q4 2024 and 11.3% in CY 2024 (lagged reporting).   Q1 Returns are likely to resemble Q4 2024 returns.  Unlevered yields approximate 10% at base rates of 4.3%. Although current credit quality remains solid, the percentage of loans in non-accrual is increasing, indicating potential defaults or markdowns in legacy portfolios.  

Additionally, the percentage of income comprising paid-in-kind (PIK) as opposed to cash is also increasing.  Competition is intensifying among private credit lenders, but conditions remain reasonably favorable in the lower middle market, where spread compression has been less severe. 

Private Real Estate

The private real estate market continued to experience a slight rebound in Q4, with the NCREIF index up 0.4% (the second consecutive positive quarterly performance).  Signs of stabilization are emerging, as cap rates level off and transaction volumes increase. 

Operating fundamentals vary by property type: industrial and multi-family rents are flat despite strong demand due to still high supply additions, while offices continue to be pressured with historically high vacancy rates.