Uncertainty Fuels Meltdown in U.S. Equities

March 12, 2025 | Catherine Hillier, Senior Research Analyst

Entering 2025, investors were overwhelmingly bullish on the outlook for U.S. equities. Positive sentiment was fueled by the perceived benefits of the incoming administration, specifically the likelihood for pro-business policies and looser regulation. These expectations drove the Russell 2000 and NASDAQ to fresh all-time highs post-election, although some of this exuberance was dampened following a more hawkish tone from the Federal Reserve in mid-December. Since his inauguration, Trump has been outspoken on tariffs and government spending, but the gravity of these measures, compounded by inconsistent implementation, has led to market uncertainty. As a result, the VIX, a measure of market volatility, reached a post-election high on March 10.

Concurrent with the spike in volatility, segments of the U.S. equity market have fallen into correction territory, defined as a decline greater than 10% from recent highs. Small-cap equities, as measured by the Russell 2000, have declined almost 17% from their high in November 2024. Small-cap equities are more economically sensitive, but underperformance has been compounded by depressed earnings. Large-cap equities, as measured by the S&P 500, achieved a new all-time high in February, but have flirted with correction territory in March, down over 9%. A shift in investor sentiment continues to weigh on U.S. equities as Trump acknowledged the potential for further volatility without ruling out the possibility of a recession. Additionally, the market darlings of the past two years, the Magnificent 7, have not been immune to market volatility, as rich valuations may make these companies more susceptible in a market pullback. This cohort of companies has declined 20% since an all-time high in December 2024, as companies like Tesla have erased all of their post-election gains.

Expectations for the U.S. equity market have fallen short thus far in 2025. As the new administration navigates the path forward, the impacts of policy decisions on the economy remain uncertain, so volatility may persist. Although volatility can be painful and is likely to continue, a disciplined and diversified approach that focuses on long-term performance is still the best recipe for portfolio success.

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