Q1 Market Review: AI, Tariffs and Inflation – Oh My!

In Q1, the markets rarely went in the same direction for more than a couple days in a row.

They were in a continual state of flux, which in some ways is the hardest state for investors to deal with. The good news is that just how today’s performance doesn’t necessarily dictate tomorrow’s, how the markets did in Q1 and similarly, how Q2 has started out, doesn’t necessarily predict the same for the rest of the second quarter.

To understand where we are, it’s always helpful to understand where we’ve been. Let’s do a quick recap of why markets performed the way they did in the first quarter of this year.

There were three main storylines for Q1: new developments in artificial intelligence, inflation, and most importantly, tariffs. Let’s start with:

Artificial Intelligence. As you know, the last two years have brought some stunning advances to the field of AI. There are now dozens of AI-related products, many designed to help companies become more productive and efficient. The more productive and efficient a company is, the more valuable it is to shareholders. As a result, the recent bull market has largely been driven by money flowing into tech companies participating in the AI boom.

But in January, a Chinese company known as DeepSeek revealed a new AI model meant to rival well-known services like ChatGPT. Because the company claims to have developed its AI with far less money and computing power, many chipmakers and AI companies have seen their share prices fluctuate dramatically in recent weeks. So, just as those same companies were responsible for much of the market’s rise, so too are they responsible for some of the market’s recent slides.

Many of these companies are also being affected by the second storyline:

Tariffs. Over the past two months, President Trump has repeatedly announced and then often suspended tariffs on China, Canada, Mexico, and other countries across the globe.

The situation seems to change – and continues to change – on a weekly basis.

Tariffs make it more expensive for companies to import the supplies they need to create their own products. (For example, a tariff on imported computer chips and semiconductors impacts many tech companies that depend on those things to power the technologies they create.) But when investors aren’t certain exactly which companies will be affected, or when, or by how much, it creates massive uncertainty. And uncertainty is nearly always the chief cause of market volatility.

Tariffs also play a role in the third and final storyline, because they have the potential to cause:

Inflation. While inflation isn’t quite the same storyline it was last year, it’s still in the background, affecting almost everything around it. That’s because, after falling to 2.4% in September, the inflation rate steadily crept back up to 3% in January. It then ticked down to 2.8% in February.

Why does this matter? Because as long as inflation remains “sticky,” the Federal Reserve is likely to keep interest rates elevated. Higher rates act like ankle weights on stock prices, and investors have been waiting for years to see them decline. When the markets move by a larger-than-normal amount in a single day, it’s often because investors are rethinking what they expect the Fed will do with interest rates.

These are some of the prime causes behind all the volatility we’ve been seeing. And because all three are interconnected, the uncertainty each one creates is compounded by the others.

Make no mistake, volatility can be frustrating. As frustrating as a spring snowstorm when you were hoping for sun. Despite this, volatility can also be a positive — because it creates opportunity. It shows us which companies are truly strong. It gives us the opportunity to own those companies at lower prices. It’s that volatility that gives us the chance to be patient when others are restless. Without volatility, we wouldn’t have experienced the rallies that followed afterward.

In fact, volatility in the markets is like volatility in the weather. It’s both a fact of life and an opportunity to experience something amazing.

Remember this: While no one can say when the current market conditions will change, we do know that they will. The storylines of tomorrow will be different than the ones of today.

The Hilltop Investment Committee will meet later in April for our quarterly multi-day review of the economic and market environment. Our clients can trust that we’ll continue to look for opportunities, make adjustments when needed, and keep them updated along the way.

And as always, if you have questions or concerns about your investments, don’t hesitate to reach out. We are here to help.

Since 1989 we have helped individuals weather global financial crises and countless personal life events. We provide financial planning and investment management services as an independent, fee-only, fiduciary firm. We want to help you live the life of your dreams, make wise decisions with confidence, and better the world around you. If you are looking for a proactive financial partner who will listen to you, reach out.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.