In Short

• Domestic equities saw their weakest quarter since 2022, with the S&P 500 down 5.6% in March and 4.3% for the quarter due to continued tariff uncertainty.
• Global diversification in portfolios has proven effective so far this year, as developed non-U.S. equities outperformed U.S. markets, boosted by fiscal stimulus in Europe—particularly Germany—and favorable currency dynamics.
• Portfolio rebalancing and active management across sub-asset class, style and region remain key amid volatility.

The Month in Markets

Investors signaled further caution in March to close out the weakest quarter for domestic equities since 2022, in an environment where tariffs and potential trade wars dominated the conversation. The S&P 500 was down 5.6% for the month and 4.3% for the quarter. The index reached correction territory (a 10% drop from the previous high), midway through the month, or only 16 trading days after hitting its all-time high on February 19. The market has not seen a correction that fast since its collapse in February 2020.

The drawdown appeared to be a reaction to the unpredictable direction of U.S. economic policy, compounded by volatile headlines, which began to spark some worry around the outlook for inflation and growth. This, in turn, showed up in key measures of consumer confidence: In March, both the University of Michigan survey of consumer sentiment and the Conference Board’s Consumer Confidence Index fell sharply, with the Consumer Confidence Index at its lowest level since January 2021. Not surprisingly, with the tariff narrative growing louder, there was a notable uptick of inflation expectations in both surveys.

These concerns were somewhat softened by the Federal Reserve’s quarterly update of economic projections, which while showing expectations for slower growth and higher inflation, implied that tariff inflation would likely be transitory in nature. While the Fed’s “dot plot” of interest rate expectations is still showing two rate cuts for 2025, some members leaned more hawkish: there were eight participants predicting one or no cuts this year and only two expecting three cuts. The Fed remains data-dependent and will continue to monitor the potential impacts of tariff policy, especially with the additional levies announced on the April 2 “Liberation Day,” including a baseline tariff of 10% on all trading partners and higher reciprocal duties on specific countries. The additional tariffs out of the White House sparked a significant sell-off for global equities, with the S&P 500 falling 10.5% in the subsequent two trading sessions, and led to a significant uptick in volatility to begin the month of April.

The Case for Diversification

Despite a negative quarter for U.S. equities, we believe it is important to acknowledge the continued broadening of returns beyond mega-cap technology stocks. Seven out of the 11 sectors, and about 47% of companies, within the S&P 500 posted positive returns year-to-date through March. As such, the equal-weighted S&P 500 index is outperforming the market-weight index so far this year (-0.6% vs -4.3%), with Consumer Discretionary and Information Technology stocks the biggest laggards. Many of the Magnificent Seven stocks had a negative impact on the broader index due to their heavy weightings: Apple, Nvidia, Microsoft, Amazon and Alphabet were among the notable detractors.

Outside of domestic equities, developed market non-U.S. equities have continued to lead performance year-to-date. There are likely some general trading dynamics at play, such as investors looking to rotate into assets with “cheaper” valuations compared to U.S. equities. Another high-level reason for the outperformance may be currency effects: As the U.S. dollar weakens, it boosts returns on international stocks for dollar-based investors. Finally, major fiscal stimulus out of Germany—a multiyear €500 billion infrastructure package—is projected to boost economic output in the region and has played a part in supporting year-to-date returns.

Thus, a well-diversified global portfolio has fared better than one more concentrated in U.S. markets so far this year. A moderately aggressive portfolio, defined as an allocation of 75% equities and 25% fixed income, diversified across asset and sub-asset class, was flat year-to-date through March. This hypothetical portfolio significantly outperformed U.S.-only portfolios, both comprised of only U.S. equities and a blend of equities and fixed income, showing the merits of diversification across asset classes and regions, especially during periods of volatility.

Moderately Aggressive Portfolio Benchmark Performance YTD

 

Source: Bloomberg as of March 31, 2025. Globally Diversified Portfolio is based on NBPW’s Moderately Aggressive – Balanced Growth Reference Portfolio (75% Equities / 25% Fixed Income) which includes global exposure. U.S. Only Moderately Aggressive Portfolio is the same portfolio but with U.S. only exposure (S&P 500 Index and BBG U.S. Agg) 100% U.S. Equities Portfolio is represented by the S&P 500 Index.

Protection on the downside can have a big impact on a portfolio. While investors with longer time horizons may be more comfortable with larger portfolio swings, it may be worth considering whether your current asset allocation maintains an appropriate balance between risk and return.

Following back-to-back years of excess returns for U.S. large-cap equities, there may have been some level of portfolio drift that is worth addressing as we continue to expect some level of convergence in U.S. large-cap earnings between mega-cap tech stocks and the broader market. In some cases, it may be appropriate to deploy some funds into other areas of the market but, in our view, conditions do not warrant a complete exit from U.S. equities. The recent “growth-scare” trade in U.S. markets has been based on soft data from surveys and models, which have so far not been borne out by hard data. We believe policymaking will become more predictable and that “animal spirits” can be revived as developments settle down on trade and tariffs, and the focus shifts to tax-cut extensions and deregulation later this year.

Protecting on the Downside Matters: Recovering Takes More Than The Drawdown Itself

 

Source: Bloomberg, Neuberger Berman

Portfolio Implications

Equities were generally lower in March, led by domestic small-cap and growth-oriented stocks, while emerging market equities moved slightly higher. We recently upgraded our views on global equities and developed non-U.S. equities due to major fiscal stimulus announced in Europe and ongoing advances in corporate governance in Japan, while maintaining an overweight to small- and midcaps as we anticipate better performance against a more predictable policy backdrop and lower rates later in the year. Otherwise, we maintain an “at-target” view across equities. Admittedly, short-term volatility related to tariffs may create pressure on certain sectors and individual stocks that are more heavily exposed to supply chain disruption. However, any larger pullbacks (-10% or more) could be an appropriate trigger to add to risk, especially if one is holding excess cash. In this more challenging environment, we favor employing active management to select companies with high earnings visibility.

Fixed Income was mixed, with shorter duration slightly higher and longer-duration bonds lower following some volatility in yields. We are more constructive on investment-grade fixed income as yields are close to fair value, with shorter-dated bonds in particular presenting little downside risk, in our opinion. With the spread of bond yields over cash rates likely to widen further, we see opportunities to deploy cash tactically, adding and/or shortening duration based on movement in rates. Multi-sector bond funds may be an appropriate vehicle to consider, given the levers a manager can opportunistically pull across sector, duration profile and region. Overall, our soft-landing outlook and debt sustainability concerns make us cautious on longer-dated bonds, even if policy rates are cut in the latter half of the year.

With a fading liquidity drought and an expected pickup in M&A and other deal activity due to a healthy macro backdrop, we believe significant opportunities still exist within Private Markets, as investors should expect new buyout activity and an unlocking of distributions. That said, liquidity and capital solutions providers will likely remain important to work through the substantial backlog of legacy investments. As a result, we continue to see compelling opportunities across secondaries, mid-life co-investments and capital solutions. We are cautious on core private real estate, but this is offset by what we see as abundant market-dislocation opportunities in the value-add and opportunistic sectors and, particularly, real estate secondaries. Neuberger Berman’s deep relationships and unique position within the private equity ecosystem have translated into record levels of deal flow across our platform.

Index Returns as of March 2025

Source: Bloomberg, total returns as of March 31, 2025. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.