Volatile markets ahead as central banks eye rate cuts in 2025

The S&P 500 index in the US fell 4.6% during the March quarter, its biggest fall since 2022.

• The March quarter saw policy uncertainty, volatile markets and a 4.6% fall in the S&P 500.
• European shares rose 5.7%, while the NZX 50 index dropped 6.4%, its worst drop in three years.
• Central banks are expected to cut interest rates, with New Zealand’s Official Cash Rate likely to reach 3.25% by mid-year.

The first quarter of 2025 is behind us and if it’s any guide of things to come, we’re in for an eventful year.

The last three months have been punctuated by policy uncertainty, shaky confidence readings and volatile markets.

The S&P 500 index in the US fell 4.6% during the March quarter, its biggest fall since 2022.

The high-flying “Magnificent Seven” group of stocks drove the sell-off, declining 14.8% and in contrast, the rest of the index was unchanged.

Other sharemarkets performed better, with European shares rising 5.7%, the UK up 5.0% and emerging market equities adding 2.4%.

Conservative assets also held their own, with New Zealand fixed income and US Treasury bonds both rising during the quarter.

Gold also continued its march higher, surging another 19.0% to all-time highs.

Local shares fared poorly, with the NZX 50 index down 6.4%, its worst quarter in almost three years.

Like the US, there were some outsized individual declines that weighed on the index.

Market heavyweight Fisher & Paykel Healthcare (which has manufacturing facilities in Mexico and sells a lot of products into the US) was down 12.7%, while Spark continued its slump with a 26.1% decline.

Infratil ended the quarter 17.6% lower as the US tech sell-off dampened the mood toward its data centre exposure.

A large capital raising from Ryman Healthcare put added pressure on the local market, with investors freeing up capital from elsewhere to participate.

Looking ahead to the next three months, it doesn’t feel like we’ll see a let-up in the action.

Tariffs will remain in focus and investors will be monitoring economic activity closely.

Global growth has been solid and it is confidence that has tumbled, but the latter will begin to impact the former if consumers and businesses remain downbeat for too long.

Central banks will find themselves back in the spotlight, with investors expecting rate cuts to resume in the US, UK, Europe and Australia during the June quarter.

Some policymakers (such as Jerome Powell at the Federal Reserve) could find themselves in an awkward position, as growth slows but inflation expectations push higher.

The picture looks clearer here in New Zealand, with another 25-basis-point cut to the Official Cash Rate (OCR) seemingly assured this coming Wednesday and then again in May.

That would see the OCR at 3.25% by mid-year, the lowest in two-and-a-half years and close to what most consider to be neutral.

Corporate earnings will soon be back in the spotlight too, with the US banks set to kick off the quarterly reporting season next week.

Analysts are upbeat about where profits are headed, with year-on-year earnings growth for the S&P 500 forecast to be 7.3% in the March 2025 quarter.

For 2025 overall, analysts expect a healthy 11.5% increase, which means updates from management will be as important as ever.

Here at home, the next batch of results is due in May when the likes of Mainfreight, Infratil, Ryman Healthcare and Fisher & Paykel Healthcare announce full-year earnings.

Across the Tasman, there’s an election campaign to follow with Australia set to vote on May 3.

The polls are close and Anthony Albanese’s Labor Party is at risk of being the first one-term Government since 1931.

It’s been an uncertain start to the year and this market dynamic is likely to continue over the short term.

In the 33 previous corrections (declines of 10% or more) since 1960, the S&P 500 has avoided a bear market (a 20% decline) 70% of the time.

The average decline on those occasions has been 14.2%, with the weakness typically lasting four months before a recovery takes hold.

To reach that point, the index would need to fall another 6.1% from the levels at the end of March.

Uncertainty could prevail for a bit longer, although this might be an environment which ultimately throws up some attractive opportunities.

Investors will need to be on their game, though, and willing to sit through more volatility than usual to take advantage of this.

Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.