Normalization Now

Q1 flipped the 2024 playbook: Breadth returned, momentum cracked, defensives rebounded, and xUS led. Changing narratives are setting up to reward active, diversified investing again.

The S&P 500 experiences its worst 2-day move since the middle of March 2020, down 10.5% on April 3 and 4, 2025, following the announcement of sweeping global tariffs by the US. The Nasdaq 100 just entered bear market territory, closing at lows 21.4% off its February 19 high. The Magnificent 7 (“Mag7”: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms and Tesla), equally weighted, have declined 28.4% since their December 17 high. This takes them back to levels first seen in May of 2024. Nvidia is down 37% as its valuation has compressed to 22.5x forward earnings, from 40x in August of 2024, when decelerating sales growth was imminent.

With a volatility index at 45, these numbers and more are bound to dramatically change in the coming days. Although those of Q1 are past, plenty of note happened worth taking stock of. Especially as we recall the extraordinary nature of 2024, shaped by record low return breadth, record high index concentration, and price dislocations surrounding the US elections:

• Only 30% of stocks outperformed the S&P 500 for the full year (the average is ~45%).
• Just 4 of 11 sectors outperformed the MSCI All Country World Index (“ACWI”): Those containing the Mag7 (IT, communication services and consumer discretionary), and financials; the remaining 7 sectors underperformed the index by an average of 13.9%.
• Since 2020, only IT and financials outperformed the MSCI ACWI, by 65% and 5%, respectively.
• Index concentration surged to unprecedented highs by mid-July and narrowly exceeded that peak in December.
• US healthcare stocks neared a 17-year relative low vs. the S&P 500 last visited in May of 2008 before a substantial recovery.
• Energy transition priced out of the market: Oil & gas storage and pipeline assets outperformed a basket of renewable-focused equities by 70%.

Shortly before the November 2024 elections, The Economist titled “The Envy of the World” referring to the US economy and its “innovation monopoly”. Q4 equity price action was dominated by the narrative of uncontested US exceptionalism. The USD rose by 7.7%, the S&P 500 outperformed European equities by 12%, matching Q3 of 2011, when the EU was in the midst of a debt crisis. The Mag7 outperformed the S&P for 9 straight days leading into their local peak in mid-December. Value indices were mechanically sold off. US healthcare stocks had their worst relative quarter in at least three decades.

In 2025, these themes and sentiment were quickly challenged: In January, China called into question US tech optimism with a new way of running AI much cheaper than most thought possible. In February, the momentum and retail trade began to falter after an explosive 6-week start to the year. By March, it became clear the new US administration would put on hold the “good stuff” as it relates to expected policy changes in favor of realizing the President’s tariff fantasies. What did it mean for markets in Q1?

• 61% of stocks outperformed the S&P 500.
• 8 of 11 sectors outperformed the MSCI ACWI by an average of 6.5%, as IT, communication services and consumer discretionary lagged by an average of 6%.
• Index concentration moderated as the Mag7 trailed the market, led down by Nvidia and Tesla.

Although US equities saw a historically rapid 10% correction as pro-growth rhetoric subsided, the MSCI ACWI ended the quarter nearly flat at -1.3%. Under the surface, significant churn materialized in a rolling broadening of stock participation. We view relative market breadth through the different, interrelated lenses of concentration, US vs. rest of world, factor rotation and state of small and mid caps below, and address implications on equity positioning going forward.