Watching the Market’s Weakness: Insights From Our CIO

After performing exceptionally well over the last two years, U.S. equity markets have stumbled to begin 2025. As of last Friday’s close, the S&P 500 was down 6% since setting an all-time high on Feb. 19, 2025, and the index fell an additional 2.7% on Monday.

We’ve also seen some of the strongest areas of the market over the last couple of years become relative laggards this year. For instance, the Communication Services, Information Technology and Consumer Discretionary sectors, which had led the S&P 500 over the last two calendar years, have been the worst performers so far in 2025. Even the much heralded Magnificent Seven – the high-flying tech stocks of Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla – have faltered.

The Decline in Context

While these are certainly trying times for investors, it is important to remember that this sort of downturn is not uncommon.

In fact, in four of the last five years we have endured intra-year declines in the S&P 500 greater than what we’ve experienced so far this year. This includes 2023 and 2024, when the S&P 500 experienced intra-year drawdowns of 10% and 8%, respectively, but recovered to finish the year up more than 20%. Prices in healthy financial markets are constantly adjusting to reflect new information, and the market decline we’ve seen this year is an example of this normal market behavior.

Market Factors This Year

In our view, the current sell-off can largely be attributed to three changes in the market environment since the end of last year.

First, we’ve received some disappointing economic data to begin the year. While economists still expect better than 2% economic growth this year and the risk of recession remains low, there are some pockets of weakness. For instance, inflation has continued to accelerate, clouding the outlook for monetary policy. Meanwhile, an index measuring new orders in the manufacturing sector fell sharply into contraction in February.  We have also seen Consumer Sentiment fall to the lowest level since 2023 amid rising credit card delinquencies, perhaps an indication that growth in consumer spending may begin to moderate. These data suggest the economy is not performing quite as well as it was at the start of the year, and the market has adjusted to this new reality.

In addition, a high degree of trade policy uncertainty has clearly contributed to this market sell-off. In our view, the Trump administration’s plans to levy tariffs on Canada, Mexico, and China – our three largest trade partners – will likely increase prices for consumers and reduce economic growth in the short-term. In addition, the unsteady implementation of these policy changes has also posed a unique challenge for markets. The 25% levy on imports from Canada and Mexico have been announced (Feb 1), delayed (Feb 3), reimposed (Mar 3) and then narrowed (Mar 6) in a little over a month. This confusing rollout has pushed measures of global trade policy uncertainty to the highest level in more than 60 years. That uncertainty has added risk to financial markets, contributing to the market sell-off.

Finally, the news of a new artificial intelligence model – the R1 model from the Chinese company  DeepSeek has challenged the dominant AI narrative of the last two years. Much of the market’s enthusiasm for AI technologies has been predicated on the idea that future development will require tremendous investment, and that those investments will translate into rapid and sustained earnings growth for some of the largest companies in the S&P 500. However, according to DeepSeek, its R1 model performs on par with models from American companies like Google and OpenAI but, the company claims, it was developed at much lower cost and without the use of the most sophisticated chips. This has raised some doubt about how much investment will ultimately be necessary to realize the potential of AI technologies. If investment falls short it raises the risk that earnings growth will fall short of expectations for the companies powering the AI boom.

Our Takeaways for Investors

Of course, understanding what may be driving the recent period of market weakness does not necessarily make enduring it any easier for investors. We offer the following advice to investors in the current environment.

1. Avoid making emotional investment decisions – in times of market stress, investors may naturally feel some pressure to act. Often these decisions are based on fear, not a sober analysis of the investment landscape. Instead of making an emotional decision in their portfolio, we encourage investors to rely on their trusted wealth advisor to help them navigate through these periods. When armed with a personalized financial plan and knowledge of your unique investment goals, your advisor can help you properly assess the risks and opportunities in your portfolio.
2. Maintain portfolio diversification – a core tenant of our investment philosophy is that portfolios should be broadly diversified across and within asset classes, and this year has provided a reminder of the benefits of portfolio diversification. While U.S. equity markets have disappointed, returns in international markets have fared much better. International developed markets have returned 10.7% so far this year, while emerging markets have returned 5.3%. Outside of equities, fixed-income allocations have served as a bulwark in portfolios. The Bloomberg US Aggregate Bond index has gained 2.2%, and municipal bonds have also delivered positive returns. We recommend maintaining portfolio diversification through regular rebalancing in all market conditions.
3. Pay attention to market valuations – after the strong performance of the last two years, S&P 500 valuations finished last year well-above the long-term average. While stretched valuations can persist in the short-term, historically they have translated into lower long-term returns. On the other hand, international equity markets are offering investors significantly more attractive valuations at current prices. When possible, investors should look to capitalize on valuation differentials when they emerge.

In closing, we are always watching the markets closely, and that’s especially the case in moments such as this. We hope that your portfolio provides you as much confidence as possible during market gyrations like this, but if you are concerned do not hesitate to reach out to your advisor to discuss your plans.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Investing in private markets is speculative and will entail substantial risks, including illiquidity. Private market investing is not suitable for all investors. Values based screen or impact investing tilts exclude certain securities/products for non-financial reasons, and therefore investors may forego some market opportunities available to those who do not use such criteria.

This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.

Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning document preparation and other legal advice is provided through select third parties unaffiliated to Mercer Advisors. Tax preparation and tax filing are a separate fee from our investment management and planning services.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER® certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.