Monthly portfolio brief

In rocky markets, broaden your lens

What you need to know

• Following a year of relatively smooth sailing and solid returns for U.S. stocks, it’s been a rocky start to 2025 as tariff- and policy-related uncertainty consumes headlines.
• A broader lens reveals the merits of portfolio diversification, given the market leadership rotation toward last year’s laggards.
• Our strategic asset allocation guidance can help ensure your portfolio maintains a broad lens and a focus on your goals amid periodic volatility.
• When rebalancing your portfolio, we recommend an overweight to higher-quality U.S. stocks, offset by underweighting international developed-market investments.
• We also favor financial services and health care stocks and, within fixed income, emerging-market debt.

Portfolio tip

Setting well-diversified strategic allocation targets can help keep your portfolio aligned with your financial goals during periodic market volatility.

Where have we been?

The pullback within U.S. stocks — last year’s best performers — deepened amid high policy uncertainty. In 2024, boosted by strong economic momentum and easing monetary policy, the three U.S. stock asset classes outperformed all others, producing solid returns greater than 10%. Further propelled by heavy exposure to top-performing mega-cap technology stocks, U.S. large-cap stocks soared 25%.

More recently, however, global trade negotiations have heated up, particularly in early April when the U.S. announced plans to impose a minimum 10% tariff on all imports and higher reciprocal tariffs on countries with which the U.S. has large trade deficits. While the announcement provided clarity around the U.S. administration’s approach, it remains uncertain how other countries may respond and to what extent new tariffs may remain in place as negotiations proceed.

Given the uncertain impact of these policies on inflation and economic growth, the pullback within U.S. stock markets intensified. U.S. large-cap stocks hit correction territory after having fallen 10% from February’s all-time high.

U.S. small-cap stocks, which are generally more sensitive to changes in the economic outlook, have fallen the most this year, down about 10% through March. Higher-quality large- and mid-cap stocks within the U.S. have dropped by 3%–5% over the same period, giving back a smaller portion of their 2024 gains.

A rotation in U.S. stocks highlights the merits of diversification. Within U.S. stock markets, concerns about elevated valuations and rising competition within tech-oriented growth stocks contributed to the volatility. We also saw a market rotation into cyclical and defensive sectors, which have taken over the top spots this year.

After returning more than 30% in 2024, large-cap growth stocks have fallen by 10% in the first three months of this year. Value-style stocks, on the other hand, have built on their 2024 gains, up 2%. Energy, health care and consumer staples are among the top-performing sectors, helping offset any weakness from mega-cap tech exposure in well-diversified portfolios.

More broadly, market leadership has rotated toward international stocks. International stocks were among the weakest-performing asset classes in 2024 but have significantly outperformed in 2025, despite the potential impact of increased barriers to trade.

Up about 7% in the first quarter of this year, international developed large-cap stocks have led the way, with proposed higher defense and infrastructure spending in Europe supporting the region's economic growth. Innovations within artificial intelligence have boosted Chinese tech stocks and, more broadly, emerging-market equity. The dollar has also weakened, lifting international stock returns.

Bonds demonstrate their stability as the Federal Reserve awaits more clarity. In March, the Fed decided to stay on the sidelines, delaying additional interest rate cuts until trade policies and their impacts on growth and inflation become more certain. They’ve indicated, however, that more cuts remain in the cards if growth moderates and inflation remains anchored.

These dynamics helped keep U.S. interest rates rangebound in March, and bonds relatively stable. Fixed-income asset classes finished last month around the flat line. They’ve produced positive returns over the one-year period, benefiting from their interest income and relatively contained credit spreads. This has helped provide stability to a well-diversified portfolio.

What do we recommend going forward?

Maintain a broad lens during volatility, with well-diversified, goal-focused strategic allocations. In our view, the S&P 500 index is too narrow of a focus for a well-diversified portfolio. It represents only one of the 11 asset classes we recommend incorporating into a portfolio’s mix of investments (U.S. large-cap stocks) and is meaningfully concentrated.

Additionally, U.S. large-cap stocks experience a 10% correction about once a year, on average. While periodic volatility should be expected, markets aren’t likely to move in unison, as we’ve seen so far this year.

Last year’s underperformers — international equity, value-style stocks and higher-quality bonds — have been among this year’s leaders, helping offset weakness in U.S. stock markets. We expect diversification and broader market leadership to continue as a key theme this year, particularly amid shifting global policies.

To incorporate this theme into your portfolio, begin by talking with your financial advisor about your comfort with risk, time horizon and financial goals. This helps determine an appropriate mix of equity and fixed-income investments for your portfolio. From there, consider the framework outlined by our strategic asset allocation guidance to help ensure your portfolio maintains a broad lens and your focus remains on your goals.

Rebalance toward your strategic allocations, favoring U.S. stocks over international developed-market stocks and bonds. Given recent market dynamics and previous years’ returns, it’s likely your portfolio has drifted from your strategic targets if it has been left unchecked. As you review your portfolio’s allocations, rebalance toward your targets to help maintain appropriate diversification as we progress through peak policy uncertainty and this period of volatility.

Using your strategic allocations as a neutral starting point, consider overweighting U.S. stocks over international developed-market stocks and bonds. Over the next one to three years, we expect the U.S. economy to maintain its position of relative strength, particularly when compared to international developed markets, which face ongoing trade uncertainties amid stagnant growth. Uncertainty surrounding trade policy may linger in the near term, but the prospects of additional central bank rate cuts, rising corporate profits and pro-growth policies such as tax reform and deregulation are likely to provide support to U.S. stock markets in the quarters ahead.

Within U.S. stocks, we favor U.S. large and mid caps, which tend to be higher-quality and more stable than smaller-cap alternatives but still offer exposure to cyclical sectors that could benefit from the relative strength of the domestic economy. We also recommend neutral allocations between value- and growth-style stocks, but recently increased financial services and health care sectors to overweight. Financial services appear less exposed to tariff uncertainty and may benefit from deregulation. Higher health care exposure may help protect against economic softness and offers catch-up potential, given valuations within the sector.

We recently reduced international bonds to underweight to offset our ongoing overweight recommendation to stocks, and we raised U.S. investment-grade bonds back to neutral. In our view, U.S. investment-grade bonds have become increasingly attractive when compared to international bonds as central banks cut rates and growth moderates, particularly given the higher yields found within U.S. bond markets.

Within high-yield fixed-income allocations, focus on quality and slightly higher interest rate sensitivity. Credit spreads within U.S. high-yield bonds have ticked higher but remain below long-term trends. With growth likely moderating, they may become increasingly volatile, which could pressure the asset class.

Conversely, emerging-market debt appears more attractively valued and tends to be of higher credit quality, which could provide an additional level of stability amid softer growth. Their higher interest rate sensitivity could also prove beneficial as the Fed continues its rate-cutting cycle in the quarters ahead and interest rates drift lower. Therefore, we recommend overweighting emerging-market debt, offset by an underweight to U.S. high-yield bonds.

We’re here for you

When markets get rocky, it can be difficult to navigate the noise. And while higher policy uncertainty will likely linger, it comes down to how these risks are managed within your portfolio. When planning for your goals, we recommend a broad lens and a diversified approach.

Talk with your financial advisor about how our strategic asset allocation guidance can help you navigate periodic market volatility, and how our opportunistic guidance can help you incorporate timely positioning when rebalancing your portfolio in this environment.

If you don’t have a financial advisor, we invite you to meet with an Edward Jones financial advisor to uncover the merits of diversification and discuss how to direct the lens of your portfolio toward your comfort with risk, time horizon and financial goals.

Strategic portfolio guidance

Defining your strategic investment allocations helps to keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity style, U.S. equity sector and U.S. investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.