Q1 2025: The Repricing of American Exceptionalism
Since the beginning of April, the words “uncertain,” “uncertainty,” and “uncertainties” have appeared more often in companies’ earnings calls and public commentary than in any other quarter on record — surpassing even the 2008 financial crisis and the Covid-19 pandemic. (Bloomberg)
The first quarter of 2025 delivered a brutal blow to U.S. market credibility. Once considered the world’s financial safe haven, the United States is now battling a loss of confidence from investors at home and abroad. The breakdown stems from a volatile combination of erratic trade policy, growing fears of stagflation, and geopolitical antagonism.
Markets typically rally in the early days of a new presidency, that was not the case under Trump 2.0. Instead, the S&P 500 closed its worst first 100 days under a new U.S. president since Nixon, plunging nearly 8% and erasing close to $4 trillion in market value. What began with post-election optimism quickly spiraled into chaos by April.
At the heart of the decline is the administration’s trade agenda. On April 2nd, what the White House called “Liberation Day”, the U.S. imposed a blanket 10% tariff on all imports. Some countries now face rates as high as 50%. China was hit hardest. Its tariffs rose to 145%, and it hit back quickly: 125% duties on U.S. goods and new restrictions on rare exports. The market response was instant and ugly. What was pitched as economic strength triggered a trade war instead. "Liberation Day" marked the moment markets lost trust.
The consequences were swift. Imports into the U.S. collapsed 19.8% in April after spiking 5.7% in March, driven by panic front-loading. Wall Street followed suit: The S&P 500 dropped 10.5% in just two days before whipsawing into its most volatile stretch since the pandemic. The VIX spiked to 53, landing in the top 1% of closes in its history. IPOs froze. M&A pipelines dried up. Private equity deals began falling apart. And capital began fleeing out of the U.S. altogether.
Meanwhile, inflation has reignited. Core PCE came in at 3.5% in Q1, up from 2.6% in Q4 2024, well above expectations. At the same time, GDP contracted by 0.3% — the first pullback in nearly three years, as consumer spending cooled to its slowest pace since mid-2023.
The Fed now finds itself with limited tools. Mr. Powell, having executed an admirable disinflationary glide path through 2023 and 2024, is suddenly trapped. Inflation is still too high to justify rate cuts. Projected growth is too weak to justify hikes. The soft landing the Fed has fought so hard to preserve is now at risk of unraveling.
And then there’s the dollar. Long a global safe haven, it has tumbled more than 9% YTD. The decline is out of sync with U.S. interest rates and reflects deeper structural concerns. Foreign investors are reassessing U.S. credibility — not just its financial standing, but the reliability of its political and economic direction. De-dollarization chatter, once speculative, is now being priced in. Capital flight from Treasuries has pushed yields higher, exacerbating refinancing costs across the economy.
This isn’t just a market tantrum. It’s the re-pricing of American exceptionalism.
What to Watch in Q2 2025:
Trade Execution Markets need more than tweets and tariffs. Investors want to see concrete deals that reduce uncertainty and restore stability to global supply chains. If the administration can finalize bilateral agreements that moderate the current tariff levels, risk assets should rebound meaningfully.
Earnings and Labor Resilience Q1 earnings were a silver lining. Microsoft, Meta, and others beat expectations and guided higher. The AI story remains intact. Enterprise investment hasn’t slowed, and the "Mag 7" continue to post strong growth. If this trend continues into Q2, especially alongside strong labor market data, it could keep consumer confidence stable and soften the recession narrative.
Follow through on pro-business policies. The market will need to see real progress on corporate tax incentives, deregulation, and infrastructure commitments to buy into any long-term upside.
In the meantime, I believe volatility is here to stay. The Fed remains handcuffed, trade tensions are not cooling, and geopolitical uncertainty, particularly with our third-largest trade partner, China, continues to escalate.
The U.S. is still the most important economy in the world. But for the first time in a long time, it doesn’t feel like the most stable.
