First Quarter 2025 Review

Personalized Portfolios account: Total Return Investment Approach

By Strategic Advisers LLC

Key Takeaways

MARKET BACKDROP

Bonds and international stocks posted gains while uncertainty surrounding tariffs pushed U.S. stock returns down.¹

POSITIONING

We added to both international developed and emerging market stocks, as well as bonds and real estate investments. Meanwhile, we sought to manage risk within asset classes by reducing exposure to companies that may have higher tariff risk.

PERFORMANCE

U.S. stocks struggled with policy uncertainty and weaker earnings results for some growth companies. Value and energy stocks had the strongest performance.

OUTLOOK

While market volatility may continue, the U.S. economy may experience a more moderate pace of growth and global earnings are anticipated to rise.

Market Backdrop

The outlook for the global economy and earnings growth remained positive.

• Unemployment remained low despite federal job cuts.
• Consumer spending stayed positive.
• The U.S. Federal Reserve (Fed) held interest rates steady.

U.S. stocks experienced volatility as shifting tariff announcements led to some uncertainty for corporate earnings. Federal job cuts also added to concerns. However, economic data was resilient during the quarter. Unemployment hovered near historic lows while inflation remained stable. Furthermore, consumers continued to spend. Additionally, the corporate earnings outlook has stayed positive, though tariffs may lead to more moderate profit growth. The Fed held rates steady as it waited to see the impact of the new administration’s policies on jobs and inflation.

U.S. Stocks

U.S. stocks fell 4.9%, with growth- and small- company stocks falling the most.² At the sector level, investors debated the earnings potential of artificial intelligence (AI) technologies. As a Fidelity Confidential Information result, technology stocks fell the furthest. Meanwhile, energy stocks rose, likely driven by the potential for greater electricity demand from emerging AI technologies.³

International Stocks 

International developed market stocks benefited from an improved outlook for economic and earnings growth. German stocks performed well, possibly influenced by government spending plans. Japanese stocks experienced small gains, as tariff concerns broadened.⁴ Emerging market stocks lagged international developed markets, as these countries may bear more of the brunt from potential tariffs. However, they still finished the quarter with gains. China posted a double-digit positive return, supported by innovations in AI and enthusiasm for its technology companies. South Korean stocks faltered at the end of the quarter due to uncertainty over tariffs.⁵

Bonds

Bonds experienced gains, supported by a decline in longer-term interest rates. Their decline likely reflected investor uncertainty around the impact of tariffs on the economy. Nevertheless, bonds have continued to offer healthy yields. High-yield corporate bonds underperformed investment-grade bonds.⁶ Within investment-grade bonds, longer-maturity bonds,⁷ Treasury inflation-protected bonds (TIPS),⁸ and mortgage-backed bonds⁹ all performed better than Treasuries and corporate bonds.

Positioning

Adjusted holdings to help manage risk and inflation.

• Increased exposure to international stocks, which have historically shown strong performance during expansions.
• Increased exposure to real estate stocks, which tend to perform well in expansions and in inflationary environments.
• Increased exposure to investment grade bonds, as they have historically performed well during most bouts of stock market volatility.

U.S. Stocks

The economy has continued to expand, although at a more moderate pace. Therefore, we have maintained our focus on core, research-driven managers who have historically performed well during periods of expansion. Our allocations reflect a moderate preference toward value stocks and small- to mid-sized company stocks. We find these investments to be attractively valued compared to the broader market.¹⁰ Additionally, we have increased our exposure to real estate stocks. We believe real estate may benefit from ongoing economic growth and declining interest rates, while also providing some protection against inflation.

International Stocks 

We added to international developed market stocks because these investments remain attractively priced relative to U.S. stocks.¹¹ Additionally, earnings expectations have improved Fidelity Confidential Information from last year. We have favored managers that invest in quality stocks.¹² We reduced exposure to very large stocks due to less favorable valuations.¹³ We also reduced allocations to companies with greater exposure to tariff risk.

We added to emerging market stocks. Emerging markets have lower valuations than the U.S. market,¹⁴ while their 2025 earnings outlook is promising.

Bonds

We added exposure to investment-grade bonds based on attractive yields and potential returns. We maintained allocations to TIPS which may perform well should inflation rise.

Performance

U.S. stocks¹⁵ struggled with policy uncertainty as some growth companies in the U.S. faced weaker earnings while U.S. value¹⁶ and energy stocks¹⁷ had the strongest performance.

• In 2024, the communication services and information technology sectors were the top performers. Communication services benefitted from investor demand for growth-focused stocks, while the technology sector thrived due to advancements in artificial intelligence.¹⁵
• Materials and healthcare stocks lagged¹⁶ as economic uncertainty in the U.S. and slowing growth in China impacted the materials sector. Healthcare stocks lagged as investors flocked to high-growth technology companies and are facing some regulatory uncertainty heading into the new year.¹⁷

Past performance is no guarantee of future results. Indexes are unmanaged. It is not possible to invest directly in an index. U.S. stocks are represented by the Dow Jones US Total Stock Market Index, International Developed Market Stocks are represented by the MSCI EAFE Index (Net MA Tax), Emerging Market Stocks are represented by the MSCI Emerging Markets Index (Net MA Tax), High-yield Bonds are represented by the ICE BAML High Yield Constrained Index, and Investment-grade Bonds are represented by the Bloomberg U.S. Aggregate Bond Index. All data is as of 3/31/2025.

Outlook

The U.S. economy may grow at a more moderate pace due to tariff uncertainty.

• The risk of an imminent recession remains low.
• Trade agreements and tax reform may improve the outlook for stocks.

We understand that some investors may be anxious after bouts of volatility at the start of the year. But our research shows that the economy remained relatively healthy, with low unemployment and positive consumer spending. Additionally, corporate profits have demonstrated a pattern of growth in past years. Looking ahead, fast moving tariff news headlines may lead to further market volatility. However, new trade agreements could potentially influence investor sentiment. There is potential for discussions on tax reform to influence market sentiment, which could impact stock performance. Should the economy or job market weaken, the Fed will likely step in and resume interest rate cuts.

As always, our team will research and monitor the economic outlook. For additional information, please view our Quarterly Market Perspective. Should the risk of recession start to increase, we will seek to manage risk within client accounts. Just as importantly, we will pursue opportunities for long-term growth if the economy starts to improve, by increasing our exposure to stocks and other investments that have historically benefitted from economic growth.

Investment Objective

The Total Return investment approach seeks to enhance total return for a given level of risk through broad diversification across asset classes.

The foregoing commentary was prepared by Strategic Advisers LLC and Fidelity Management & Research Company LLC. Strategic Advisers LLC provides discretionary portfolio management services for Personalized Portfolio account: Total Return Investment Approach.

Strategic Advisers LLC and Fidelity Management & Research Company LLC are a registered investment advisers and Fidelity Investments companies.

¹ U.S. stocks as measured by the Dow Jones U.S. Total Stock Market Index, international stocks as measured by the MSCI All Country World (ACWI) ex U.S. Index (Net MA Tax), and bonds are measured by the Bloomberg U.S. Aggregate Bond Index, as of 3/31/2025.

² Dow Jones U.S. Total Stock Market Index, Russell 1000 Growth Index, and Russell 2000 Index, respectively, as of 3/31/2025.

³ Based on an ICB Industry breakdown of the Dow Jones U.S. Total Stock Market Index, as of 3/31/2025.

⁴ Based on a country-level breakdown of the MSCI EAFE Index, as of 3/31/2025.

⁵ Based on a country-level breakdown of the MSCI Emerging Markets Index, as of 3/31/2025.

⁶ ICE BofA U.S. High Yield Constrained Index and Bloomberg U.S. Aggregate Bond Index, respectively, as of 3/31/2025.

⁷ Based on a maturity breakdown of the Bloomberg U.S. Aggregate Bond Index, as of 3/31/2025.

⁸ Bloomberg U.S. Treasury Inflation-Linked Bond Index, as of 3/31/2025.

⁹ Bloomberg U.S. MBS Index, as of 3/31/2025.

¹⁰ Based on forward P/E ratios for the S&P 500 Index, Russell 1000 Value Index, and Russell 2000 Index, respectively, as of 3/31/2025.

¹¹ Based on trailing P/E ratios for the MSCI EAFE Index and S&P 500 Index, as of 3/31/2025.

¹² Quality stocks tend to have stable earnings and low levels of debt relative to other stocks. These investments have historically done well during expansions.

¹³ Based on forward P/E ratios for the MSCI EAFE Large Cap Index vs. the MSCI EAFE Small and Mid Cap Indices, as of 3/31/2025.

¹⁴ Based on trailing P/E ratios for the MSCI Emerging Markets Index and S&P 500 Index, as of 3/31/2025.

¹⁵ Dow Jones U.S. Total Stock Market Index, as of 3/31/2025.

¹⁶ Russell 1000 Value Index, as of 3/31/2025.

¹⁷ Based on an ICB Industry breakdown of the Dow Jones U.S. Total Stock Market Index, as of 3/31/2025.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Indexes are unmanaged. It is not possible to invest directly in an index.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

Lower-quality debt securities generally offer higher yields, but they also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

Investments in smaller companies may involve greater risk than those in larger, more well‐known companies.

Index information:

Securities indexes are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds.

Benchmark returns assume the reinvestment of dividends and interest income. Investments cannot be made directly in a broad‐based securities index.

- The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate pass-throughs), asset-backed securities and collateralized mortgage-backed securities (agency and non-agency).

- Bloomberg U.S. MBS Index is a market value–weighted index of fixed–rate securities that represent interests in pools of mortgage loans, including balloon mortgages, with original terms of 15 and 30 years that are issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corp. (FHLMC).

- The Bloomberg U.S. Treasury Inflation-Linked Bond Index measures the performance of the U.S. Treasury Inflation Protected Securities (TIPS) market. Federal Reserve holdings of U.S. TIPS are not index eligible and are excluded from the face amount outstanding of each bond in the index.

- Dow Jones U.S. Total Stock Market Index is a float-adjusted market capitalization–weighted index of all equity securities of US headquartered companies with readily available price data.

- ICE BofA U.S. High Yield Constrained Index is a modified market capitalization–weighted index of U.S. dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch). The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the US or a Western European nation. The FX-G10 includes all Euro members, the U.S., Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden. In addition, qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule and at least $100 million in outstanding face value. Defaulted securities are excluded. The index contains all securities of The ICE BofA U.S. High Yield Index but caps issuer exposure at 2%.

- MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of large and mid cap stocks in developed and emerging markets, excluding the United States. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

- MSCI EAFE Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed markets, excluding the U.S; Canada. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

- The MSCI EAFE Large Cap Index is an equity index which captures large cap representation across developed market countries around the world, excluding the U.S. and Canada. With 281 constituents, the index covers approximately 70% of the free float-adjusted market capitalization in each country.

- MSCI EAFE Small Cap Index is a market capitalization-weighted index that is designed to measure the investable equity market performance of small cap stocks for global investors of developed markets, excluding the U.S. & Canada. Index returns are adjusted for tax withholding rates applicable to U.S.-based mutual funds organized as Massachusetts business trusts (NR).

- The MSCI EAFE Mid-Cap Index is an equity index which captures mid cap representation across developed market countries around the world, excluding the U.S. and Canada. With 413 constituents, the index covers approximately 15% of the free float-adjusted market capitalization in each country.

- MSCI Emerging Markets Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in emerging markets. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts (NR).

- Russell 1000 Growth Index is a market capitalization–weighted index designed to measure the performance of the large-cap growth segment of the U.S. equity market. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth rates.

- Russell 1000 Value Index is a market capitalization–weighted index designed to measure the performance of the large-cap value segment of the U.S. equity market. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth rates. Effective March 24, 2025, the index applies a capping methodology. Index constituents are capped quarterly so that no more than 22.5% of the indexes weight may be allocated to a single constituent, and the sum of the weights of all constituents representing more than 4.5% of the index should not exceed 45% of the total index weight. For periods prior to March 24, 2025, the index was uncapped.

- Russell 2000 Index is a market capitalization–weighted index designed to measure the performance of the small-cap segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000 Index.

- S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Fidelity® Wealth Services provides non-discretionary financial planning and discretionary investment management through one or more Personalized Portfolios accounts for a fee. Advisory services offered by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. Strategic Advisers, FBS, and NFS are Fidelity Investments companies.

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