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Innovative companies and small cap opportunity equities generally fared poorly in Q1 as markets braced for U.S. tariff uncertainty in the second half of the quarter.
The global economy experienced significant turbulence in Q1, primarily due to U.S. President Donald Trump’s implementation of extensive tariffs. These tariffs, announced as part of a “Liberation Day” initiative, targeted imports from numerous countries, aiming to reduce U.S. reliance on foreign goods. The broad scope of these measures sparked fears of a global trade war, leading to substantial declines in stock markets worldwide. Major indices, including the S&P 500 and Japan’s Nikkei, saw notable losses, while investors sought refuge in safer assets like gold, which reached record highs.
US equities faced headwinds in Q1, with the S&P 500 declining -4.3%, marking its worst quarterly performance since Q3 2022. The quarter began strongly, driven by large cap growth stocks holding near cycle highs until mid-February, the S&P 500 index hit a new record high as of February 19th. However, a sharp reversal occurred in the second half due to Policy uncertainty, Federal reserve caution, and Geopolitical risks.
A broad rotation from growth to value stocks occurred, with the equal weighted S&P 500 returning -0.61% outperforming the market weighted S&P 500 Index. This reflected investor shifts toward undervalued sectors and away from mega-cap stocks, which had dominated earlier gains. 7 out of 11 large cap GICS sectors ended Q1 positively, with Investors favoring defensive sectors like Energy, Healthcare and Consumer Staples which returned 10.2%, 6.5% and 5.2% respectively. Small cap value stocks, as measured by the Russell 2000 value index fell -8.24% while the innovation-heavy NASDAQ index fell -10.42%.
In this environment, we continue to favor innovative companies offering attractive growth prospects. Some our themes include the rapid adoption and deployment of artificial intelligence, cyber security, healthcare innovation and migration of data to the cloud. Meanwhile, our small cap value selection process continues to find overlooked and underappreciated opportunities across several key market sectors.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
