Global Market Snapshot - March 2025

Market Review

Market performance diverges amid economic growth concerns and fiscal policy uncertainty

In February, non-U.S. equities led markets for a second consecutive month as both developed international and emerging markets (EM) outperformed U.S. equities. The strong returns for developed international equities were driven by stock indices in Europe, which reached record highs following election results in Germany, an interest rate cut from the European Central Bank (ECB) and hopes for a Russia-Ukraine peace deal. EM equity returns were boosted by a continued rebound in technology stocks in China, particularly following the release of innovative artificial intelligence (AI) application, DeepSeek LLM, at the end of January.

U.S. equities sputtered to a negative finish for the month, led lower by small- and mega-capitalization (cap) technology stocks. A strong earnings season was outweighed by a soft patch in economic data; retail sales and services PMI came in below consensus expectations. Fixed income markets were supported by falling long-term interest rates. The 10-year U.S. Treasury (UST) yield declined more than 30 basis points (bps) — the biggest monthly decline since July. As the Federal Reserve (Fed) paused interest rate cuts, the yield curve, as measured by the spread between the 10- year and 3-month UST, reinverted after normalizing in mid-December (Figure 1). 

Figure 1. 10-year and 3-month UST Spread (Bps)
Yield curve reinverts as macro uncertainties mount

As of 2/28/2025. Source: Bloomberg L.P.

View accessible version of this chart.

Theme of the Month

Developed international equities — does a strong start to 2025 change our outlook?

Thus far in 2025, geographic diversification has paid off rather unexpectedly. While this phenomenon is not an anomaly — international equities have started the past four out of five years outperforming domestic equities — they were only able to sustain that outperformance for the full year in 2022 (Figure 2).

Figure 2. MSCI World ex USA Returns
Is seasonal outperformance at play or will 2025 be different?

Year	MSCI World ex USA Returns through February	Outperforming S&P 500®?	Outperforming for the entire year?
2025	6.9%	Yes	??
2024	2.2%	No	No
2023	5.7%	Yes	No
2022	-5.8%	Yes	Yes
2021	1.5%	Yes	No
2020	-10.6%	No	No

As of 2/28/2025. Source: Bloomberg L.P.

In our view, international equities are rebounding from their post-U.S. election selloff in fourth quarter 2024, which was their worst fourth quarter since 2018. While the start to this year has served as a reminder of why we recommend a globally diversified portfolio, it still begs the question: is this another head fake or the beginning of a long-term trend?

So far this year, there have been green shoots for European markets, which comprise over half of the MSCI World ex USA index, and recall that developed international equities began 2025 at a large valuation discount relative to U.S. equities. From a macro perspective, there are several potential positive catalysts for the asset class.

The ECB cut interest rates by 25 bps in February, and additional cuts are priced in throughout the remainder of the year. The prospect of a peace deal in the Russia-Ukraine war has boosted European markets as a resolution, and consequently, falling energy prices would benefit the region’s growth and inflation prospects. There is evidence of the market looking ahead to these possible outcomes. For example, oil and grain prices have come down, the U.S. Dollar Index has depreciated and both Ukrainian reconstruction and European defense company stocks have appreciated over the last two months. Additionally, recent election results in Germany met expectations and have been interpreted as leading to a stronger coalition, led by two stable political parties. All these positive, short-term catalysts, combined with a market that was largely priced for bad news, have contributed to the resurgence of a previously out-of-favor asset class throughout the past two months.

Additionally, while the new U.S. administration has signaled a change in its historically close partnership with the Eurozone, it has in turn increased the likelihood of higher European defense spending. As a result, German officials recently announced plans to significantly expand fiscal spending for defense and a dedicated $500 billion euro infrastructure fund. The plan still awaits approval by a new coalition government as a result of the February elections.

However, should it be approved in the coming months, the size and scale of such a stimulus package could be a significant long-term positive for the German economy, which remains mired in slow growth and with a manufacturing base in contraction for more than two years.

For sustained outperformance, we believe developed markets would need to outpace both U.S. and EM in terms of economic output, earnings growth and technological innovation. However, the MSCI World ex USA Index’s highest sector weightings are Financials and Industrials, which comprise a combined 39% of the index and are highly correlated to economic growth. Therefore, many catalysts supporting economic growth would have to come to fruition, and expecting this confluence of factors to materialize at the same time is a high bar, in our view.

While we recommend a developed international allocation in portfolios, we believe maintaining a home-country bias by overweighting U.S. equities remains prudent. We have low confidence that the positive returns for developed international equities to start the year are indicative of sustainable trends. A lasting peace deal in the Russia-Ukraine war could prove to be elusive, and many structural issues are still in place, including a lack of innovation in the AI cycle and a relatively tighter regulatory environment.

Given the U.S. is the European Union (EU)’s largest trading partner (according to Bloomberg data), U.S. proposals for tariffs on countries within the EU could materially impact its economic growth. Perhaps most importantly, the economic projections and earnings growth trends for Europe are already weak compared to those of the U.S., which continues to support our unfavorable view of the asset class in 2025.

Negative U.S. earnings revisions persist 

Calling to mind one of our favorite investment adages, “sentiment drives price in the short run, but earnings drive price in the long run,” we believe it is notable that first quarter 2025 earnings revisions have already declined by the largest amount since second quarter 2020 (Figure 3). Granted, these numbers are through month-end, so they could improve before the quarter ends, but we find that unlikely given the proliferating talk of tariffs, the primary factor driving revisions lower.

Figure 3. S&P 500 Intra-quarter Earnings Revisions
Fiscal Policy concerns lead to worst intra-quarter revisions since 2Q20

As of 2/28/2025. Source: : FactSet^®, FactSet^® is a registered trademark of FactSet Research Systems, Inc., and its affiliates.

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Sectors with the largest revisions since the beginning of earnings season include Consumer Discretionary, Materials and Industrials. All three include industries that are expected to have the greatest exposure to rising prices, including automobiles, metals & mining and machinery. The Financials sector has also experienced outsized revisions; however, it is almost entirely stemming from the insurance industry, due to natural disasters that occurred early in the quarter.

The Information Technology and Communication Services sectors have also had negative revisions, but remain in line with their historical averages. Furthermore, while results from several mega-cap companies did not meet the expectations set by lofty valuations, they still indicated that the AI innovation cycle is progressing. In our view, the outlook would be materially different if tariffs were placed on industries and goods disrupting the technological innovation cycle.

Despite the uncertainty of foreign trade policy, we continue to have a positive outlook on earnings growth in 2025. Estimates for the S&P 500^® have already declined approximately 100 bps, largely in line with the potential impact of sustained tariffs on the industries expected to be most affected. Therefore, should tariff policies be short-lived, the negative revisions could lead to material upside surprises if the economic impact of tariffs turns out to be less than consensus expects.

For more information, please contact your PNC advisor.

TEXT VERSION OF CHARTS

Figure 1: 10-year and 3-month UST Spread (BPS) (view image)
Yield curve reinverts as macro uncertainties mount

Date	10-year and 3-month UST Spread (bps)
2/2024	-113.745
4/2024	-72.764
6/2024	-96.404
8/2024	-121.863
10/2024	-27.042
12/2024	24.164
2/2025	-9.635

As of 2/28/2025. Source: Bloomberg L.P.

Figure 2: MSCI World ex USA Returns (view image)
Is seasonal outperformance at play or will 2025 be different?

Year	MSCI World ex USA Returns through February	Outperforming S&P 500®?	Outperforming for the entire year?
2025	6.9%	Yes	??
2024	2.2%	No	No
2023	5.7%	Yes	No
2022	-5.8%	Yes	Yes
2021	1.5%	Yes	No
2020	-10.6%	No	No

As of 2/28/2025. Source: Source: Bloomberg L.P.

Figure 3: S&P 500 Intra-quarter Earnings Revisions (view image)
Fiscal policy concerns lead to worst intra-quarter revisions since 2Q20

	S&P 500 Intra-quarter Earnings Revisions
Q2 2020	-30.48
Q3 2020	4.26
Q4 2020	3.51
Q1 2021	7.96
Q2 2021	11.04
Q3 2021	3.23
Q4 2021	0.47
Q1 2022	-1.05
Q2 2022	-1.84
Q3 2022	-3.91
Q4 2022	-5.78
Q1 2023	-5.44
Q2 2023	-2.91
Q3 2023	-0.02
Q4 2023	-5.43
Q1 2024	-2.21
Q2 2024	-0.23
Q3 2024	-3.47
Q4 2024	-2.88
Q1 2025	-6.22

As of 2/28/2025. Source: FactSet^®, FactSet^® is a registered trademark of FactSet Research Systems, Inc., and its affiliates.