Cetera Sees Opportunity in Diversification as Market Correction, Global Stimulus Unfold

As the second quarter of 2025 begins, investors are confronting a mixed macroeconomic picture: a U.S. equity market correction, new global stimulus efforts and rising uncertainty around artificial intelligence and trade policy. According to Cetera Investment Management’s Q2 report, Steering Through Uncertainty, staying diversified may be the smartest strategy amid shifting economic dynamics.

Markets Correct, International Equities Rally

The S&P 500 entered correction territory in March, falling more than 10% from its recent highs — the first such drop since October 2023. However, international markets are outperforming, with the MSCI EAFE index up over 12% year to date and emerging markets up 8.5%, compared to a 3.5% decline in the S&P 500. Value stocks have taken the lead over growth stocks, while bond markets are delivering modest gains.

“This is a rare moment when diversified, balanced portfolios are doing better than headline U.S. equity indexes,” the report said, emphasizing that 2025 may finally reward diversification after years of large-cap tech dominance.

AI Craze Meets Competition

Investor excitement around artificial intelligence was shaken in January when China’s DeepSeek released more efficient, open-source AI models, prompting questions about the return on investment for massive U.S. tech spending. American companies had pledged up to $500 billion for AI infrastructure, but DeepSeek’s lower-cost approach has raised sustainability concerns — especially for chipmakers and AI infrastructure providers.

U.S.-based OpenAI has accused DeepSeek of improperly using data derived from its own models, adding a legal dimension to the brewing international competition.

Trade, Government Cuts Create Policy Fog

Tariffs are back in focus, with public negotiations creating headline-driven volatility. Companies have begun pausing hiring and production while awaiting policy clarity. Meanwhile, the Department of Government Efficiency (DOGE) aims to reduce federal spending and payrolls — moves that could drag on GDP growth and increase unemployment if not offset by stimulative measures.

Though inflation concerns are easing, higher prices coupled with slowing consumer confidence have sparked new worries around demand, especially given that consumer spending drives 70% of U.S. GDP.

Labor Market Offers Stability

Despite these concerns, job openings remain historically strong, and recent jobless claims have declined. While Challenger-reported job cut announcements spiked in February, the broader labor market is holding up. This gives the Federal Reserve some flexibility, with potential interest rate cuts back on the table if conditions deteriorate further.

“Uncertainty is high, but the data doesn’t yet point to a recession,” the report noted. Service sector strength and cooled inflation help support continued growth — albeit at a slower pace.

Global Stimulus May Counter Tariff Pressures

Abroad, Germany is preparing a major fiscal stimulus package, relaxing its historically conservative budget policies. Meanwhile, China is planning domestic spending increases, including wage hikes and childcare subsidies, aimed at boosting consumption and counteracting the effects of potential U.S. tariffs.

These moves may support international equities and global economic stability, providing new opportunities for investors looking beyond U.S. borders.

Bond Market Signals: Calm, Not Crisis

Bond yields have declined modestly. The 10-year Treasury yield fell around 0.25 percentage points since January, signaling lower expectations for growth and inflation. High-yield spreads have widened slightly — a typical risk response during equity corrections — but remain far below levels seen during past recessions.

The market now anticipates one to two rate cuts over the next 12 months, a shift from earlier expectations of none. “Bond investors are signaling caution, but not fear,” Cetera said.

Bottom Line: Stay Diversified, Stay the Course

While AI disruption, policy risk and market corrections have stirred investor anxiety, the broader economy appears stable. A resilient labor market, easing inflation and global stimulus efforts offer reasons for optimism.

Cetera’s core message: “Everything seems different this year, but it’s playing out much like anticipated.” For advisors and investors alike, that means maintaining diversified portfolios and disciplined strategies is more important than ever.

Cetera Investment Management LLC is an SEC-registered investment adviser that provides market research, portfolio guidance and investment strategy to financial professionals affiliated with Cetera Financial Group. The firm delivers regular insights and model portfolios to help advisors and clients navigate changing market conditions with informed decision-making.

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