Q1 2025 in Review and Q2 2025 Market Outlook

The first quarter of 202a5 didn’t quite turn out as many investors thought it would, with US President Donald Trump’s trade wars upending the rosy outlook for the economy. After the stock market hit record highs to start the year, tariff threats spooked investors and dimmed the outlook. The result was a 10% slide from February’s peak into “correction territory.”

On the plus side for investors, bonds gained as concerns about the economy offset disappointment over stubborn inflation and shrinking expectations for Federal Reserve interest rate cuts.

As the second quarter of 2025 gets underway, what’s the outlook for the stock and bond markets? What stock sectors are most attractive? What should investors do from here? We’ve gathered insights and perspectives from analysts and specialists about market performance, individual stocks, sectors, and mutual funds.

Q1 2025 Market Performance and the Economy

Stocks went into the start of 2025 with the bull market solidly intact, albeit with valuations beginning to look stretched. The Fed appeared to have achieved a soft landing for the economy, and investors were still looking forward to rate cuts. That backdrop began to change under the new administration in Washington, as signs of a trade war emerged on Day 1. By late February, growth stocks were rolling over and the hottest stocks of 2024 were falling fast.

Here is our look at the big market and economic trends from the first quarter, along with Morningstar’s market outlook for the second quarter and beyond.

Q1 2025 Stock Performance and Q2 Sector Outlooks

If there was a catchphrase for the first quarter, it was “market rotation.” Looking at sector and style returns, investors could simply hold a mirror up to 2024 and see its trends reverse. Growth stocks fell sharply while value rallied. Technology and communications stocks stumbled while basic materials, healthcare, and energy jumped.

Here, we take a deeper dive into first-quarter performance among sectors and individual stocks. We’ve also got outlooks for the next quarter, with the top stock picks from Morningstar’s analysts.

Q1 2025 Mutual Fund Performance and Top Picks

For mutual fund investors, long-suffering value funds and dividend strategies finally got a chance to shine, as did international stock funds. On the bond side of the fence, strategies with greater sensitivity to changes in interest rates got a boost as bond yields fell.