Quarterly Economic Analysis - Q1 2025
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Portafolio Capital Q1 Snapshot™
Yield Curve Inverts in March 2025
Real GDP Ends Six-Quarter Expansion Streak
S&P500 Pulls Back 4.6%, Energy Leads
Foreword
For most of 2024, uncertainty dominated investor conversations worldwide. Much of that unease stemmed from the incoming administration and the campaign-trail policies it carried into office. Debates over immigration, trade, and energy buffeted markets and set the stage for the pronounced volatility we saw in the first quarter of 2025.
Nonetheless, the steepest drawdown arrived right after Q1 closed. The Trump 2.0 administration moved quickly to roll back many policies implemented by the Biden administration, and its new tariffs on several of the United States’ trading partners prompted corporate leaders to revisit their balance sheets and strategic positioning as the new year unfolded.
I witnessed this mood firsthand while attending Bloomberg Invest in New York City early March, where much of the conversation revolved around price action and the shifting global order created by the tariff regime. Volatility was elevated all week; even so, I viewed much of the movement as noise rather than a signal. I spent those March-April days reminding investors that the sell-off was not driven by fresh economic data.
Fast-forward to today: markets have reached new all-time highs. The probability of a recession is fading, yet Chair Powell and the rest of the Federal Reserve have made it clear they will not cut rates further until they fully understand how tariffs are influencing inflation. With unemployment hovering just above 4 percent for much of the first quarter, the Fed’s dual-mandate focus remained intact and appeared to be guiding the economy toward a soft landing.
Executive Snapshot
Yield-curve inversion returned: the 10-year minus 3-month Treasury spread slipped back below zero in March (-0.06%) after two positive months, reviving a well-watched recession signal. fred.stlouisfed.org
Growth pause: real GDP fell -0.5% seasonally adjusted annualized rate (SAAR) in Q1 2025 after a 2.4% gain in Q4 2024, ending a six-quarter expansion streak. bea.gov
Markets pulled back: the S&P 500 lost -4.6% in Q1, its weakest quarter since 2022; Energy was the lone standout sector (+9.3%). reuters.com
The macroeconomic picture remained grim throughout most of the first quarter of 2025. By late February the 10-year/3-month Treasury spread turned negative, and on 3 March it fell as deep as –0.19 percentage points—its first sustained dive below zero since 2023—and briefly touched –0.27 percent on April 4th. Yield-curve inversions are not fool-proof, but they have preceded every U.S. downturn since 1970, so the signal warrants respect.
At the same time, the underlying economy remained surprisingly resilient: retail sales jumped 1.4 percent in March and 4.6 percent year-on-year as households front-loaded purchases ahead of the new tariff schedule and the ISM services PMI, though cooling, stayed in expansion territory at 50.8.
In short, the yield-curve warning is clashing with a consumer-led expansion that has weathered higher policy rates for more than a year. Investors need to weigh that historically ominous, rate-market signal against still-solid spending and services data before concluding that recession is imminent.
Equities markets lagged with the S&P 500 and Nasdaq having their worst month (March) since December 2022, and both ending the first quarter of 2025 -4.6 percent and 10.5 percent, respectively. The Dow Jones Industrial Index (DJIA) closed down -1.28 percent for the quarter. In the broad picture of things, the catalyst for the negative price movement was in no doubt inspired by the conversation of tariff negotiations across the global economy. Energy markets led the bull for the first quarter of 2025, with Consumer Discretionary and IT both performing negatively at -14 percent and -12.8 percent, respectively.
Macro Dashboard, Q1 2025
Portafolio Capital Management MACRO DASHBOARD Q1 2025
Set aside the curve inversion and the lone negative GDP print; the rest of the dashboard still sketches a sturdy, if uneven, backdrop. Housing underscores that resilience: permits have hovered near 1.48 million SAAR pace for three straight months, even as March starts sagged amid weather and tariff noise, evidence that builders still anticipate solid future demand. Labor is cooling, but only gradually. The unemployment rate inched up to 4.2 percent, a reading that historically screams midcycle, while job openings remain plentiful and wage growth, though easing, still outpaces core inflation.
Disinflation also remains on script; both headline CPI and the Fed’s preferred PCE price index have dropped another 30 to 40 basis points year to date, nudging closer to the 2 percent target without additional policy help. Manufacturing is wobbling, as the ISM index slipped back below 50 in March, yet robust services activity and steady consumer spending offset that weakness.
Against this backdrop, the Federal Reserve is standing pat but staying alert. With the funds rate parked at 4.25 to 4.50 percent, Powell and company can wait to see how tariffs and slower global growth filter through. Unless inflation flares up again, the next meaningful move still appears more likely to be a cut than a hike. Bottom line: earnings are holding, disinflation is buying the Fed time, and the consumer, no longer overheated but far from spent, continues to provide a solid floor under U.S. equities.
Economic Interpretation, Q1 2025
Shifts In The Economy Matter
Recession watch intensifies. The curve’s renewed inversion plus a negative Q1 GDP print raise the probability of a late-2025 slowdown.
Inflation is cooling but not yet “mission accomplished.” CPI slid to 2.4% YoY by March; core PCE is still a touch above the Fed’s 2% goal.
Corporate earnings volatility. A $-90 bn swing in profits shows tariff-related cost pressure and softer demand working through balance sheets.
Housing mixed. Permits are flat year-on-year, but March’s 11% drop in starts underscores builder caution amid higher material costs.
All told with the economy in perspective, the macro tape flashed yellow in the first quarter of 2025, not red. Growth momentum eased as price pressures glided lower, giving the Fed room to step in if the slowdown deepened into Q2. Corporate profits eased slightly and builders were cautious, yet a resilient consumer and solid labor market still provide a firm floor for the US economy. Portafolio Capital remains selective, favoring quality balance sheets and ample liquidity until the next data wave clarifies the path ahead for financial markets.
Looking Ahead, Q1 2025
May 2 April Jobs Report
May 7 FOMC Meeting & Powell Press Conference
May 13 April CPI Release
Jun 6 May Jobs Report
Jun 11 May CPI Release
Jun 18 FOMC Meeting & Powell Press Conference
Jul 3 June Jobs Report
Jul 15 June CPI Release
Jul 30 Advance Q2 GDP Estimate
As we close the books on Q1 2025 and turn our focus to the second quarter, we at Portafolio Capital are watching several key releases that will either reinforce our investment conviction or prompt us to recalibrate. April and May inflation prints, along with the monthly employment reports, will show whether price pressures and labor demand are easing in tandem. The Federal Open Market Committee meets twice this quarter, in early May and mid-June, and Chair Powell’s post-meeting press conferences should clarify how far the Fed is willing to lean into a wait-and-see stance. Finally, the advance Q2 GDP estimate, scheduled for late July, will give us the first hard read on spring-quarter growth and help confirm, or challenge, our soft-landing thesis.
Despite the first quarter’s headline noise, including tariff negotiations, proposed spending cuts, and a brief yield-curve inversion, we remain constructive on U.S. market dynamics. Our core view that domestic equities will outpace emerging and other international markets holds firm as we enter Q2. Although recession odds have edged lower since March, we continue to favor high-quality U.S. names and expect them to lead global capital markets into year-end.
Mauricio Sanchez
Portfolio Manager & CIO
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Portafolio Capital Management is an independent wealth and capital management firm based in San Antonio, Texas. With over 12 years of combined investment and macro-economic analysis experience, our goal is to instill confidence in our investors through how we view markets and our investment approach. As a Registered Investment Advisor (RIA) and fiduciary, we are held to the highest standard when it comes to managing your money and are bound by law to act solely in your best interest.
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