January: Trump Trade. February: AI Anxiety. March: De-Grossing Disaster. The quarter's shifting market narratives have proven more revealing about investor psychology than economic fundamentals. As Goldman Sachs trader Bobby Molavi aptly notes, 2025 has been "quite a topsy turvy start to the year."
January's optimism reflected textbook wishful thinking. Markets embraced a "heads I win, tails you lose" thesis on the Trump administration. De-immigration, de-regulation and de-globalisation would somehow supercharge US economic growth without sacrificing stability. US equities outperformed as capital flooded toward American exceptionalism.
February's sobering reassessment came as China's Deepseek reminded investors that AI innovation extends beyond Silicon Valley. The "concentration risks" that had been cheerfully ignored suddenly demanded a premium. While the S&P maintained its composure, beneath the surface rotation accelerated away from the magnificent seven toward broader technology beneficiaries.
March delivered the quarter's dramatic finale. What began as standard profit-taking morphed into what Molavi calls a "domino event" – a 4-standard deviation move in performance triggering a 3-standard deviation response in flows. De-grossing accelerated across crowded positions. Growth, momentum, non-profitable tech, meme stocks – all tumbled in sequence. The mechanics of unwinding overwhelmed fundamental considerations.
The quarter's whipsawing narratives reflect a market increasingly driven by positioning rather than value. As passive funds control over 50 per cent of assets and retail traders generate a quarter of daily volumes, the market's time horizon has collapsed. We have entered what Molavi calls "a world of small alphas amplified by leverage and encouraged to churn."
The quarter's volatility raises questions about the Trump/Fed "put" that markets have traditionally relied upon. The administration's willingness to discuss "de-toxification" of markets suggests the safety net sits lower than many assumed in January. Meanwhile, the Federal Reserve signals a more hawkish stance than expected, with "0 to 1 cuts for the rest of this year."
For investors, the lesson is clear: market narratives serve primarily as post-hoc rationalisations for momentum and flows. Tariff concerns could easily become next quarter's driving thesis, or be forgotten entirely if markets regain their footing. US tariffs now stand at levels not seen since 1930, yet equity markets have largely shrugged off potential implications.
The quarter's rapidly shifting narratives reveal a market increasingly detached from economic fundamentals. When stocks trade more on positioning than prospects, prudent investors should prepare for more frequent "de-grossing" episodes ahead.
Sticky inflation meets sectoral divergence as consumer sentiment falters
February's core PCE rose to 0.4 per cent month-on-month and 2.8 per cent annually, drifting further from the Fed's 2 per cent target. This stubborn inflation persists despite the Atlanta Fed's GDPNow tracker turning sharply negative at -2.8 per cent for Q1, though this appears driven largely by import timing rather than fundamental weakness.
A striking sectoral divergence has emerged, with manufacturing slipping into contraction (PMI 49.8, down from 52.7) while services dramatically accelerated (PMI 54.3, up from 51.0). This split complicates the economic narrative and suggests uneven impacts of monetary tightening across the economy.
Consumer sentiment has deteriorated markedly, with Michigan's index plunging to 57 from 64.7 and the Conference Board's measure dropping to 92.9 from 100.1. Yet the labour market remains stable with steady jobless claims, providing critical support to household finances even as confidence wanes.
For the Fed, these crosscurrents present a policy dilemma: weighing still-elevated inflation against potential economic softening. Investors face a similarly challenging environment, as equity markets largely shrug off mixed data while bond markets reprice rate expectations. The steady ship many had hoped for in 2025 appears increasingly elusive.
Athleisure brand blames economy for conservative guidance as product refresh takes hold
Lululemon's underwhelming annual guidance has raised eyebrows despite a solid fourth quarter that beat expectations. The yoga wear seller's forecast of 7.5 per cent revenue growth and just 3 per cent earnings growth falls short of analysts' hopes. Management conveniently points to macroeconomic weakness and consumer hesitancy in the US, echoing peers like Nike and Abercrombie.
The retailer appears to have fixed its product assortment issues that plagued 2023 and most of 2024. New launches like the "Glow Up" franchise and "Daydrift" pants have sold out in several sizes, suggesting the brand's appeal remains intact. Meanwhile, international growth continues to impress with China revenues up 38 per cent and Rest of World up 30 per cent. The issue lies squarely in the Americas, where growth crawled to just 2 per cent.
Behind the conservative outlook lurks a deliberate strategy to lower the bar. Management has baked in little improvement to US traffic trends for the entire year, despite seeing higher conversion rates from shoppers who do visit stores. With a membership program that has grown 40 per cent in six months to 28m members, Lululemon retains powerful levers to drive engagement when consumer confidence rebounds.
Trading at 20 times forward earnings, the premium athleisure brand sits between traditional apparel retailers and high-growth names. That multiple looks reasonable if Lululemon can reaccelerate growth once economic clouds clear. But if weak US performance persists despite product improvements, investors may conclude the brand's elastic appeal has finally reached its limit.
· OpenAI has integrated new image generation capabilities directly into ChatGPT, introducing an autoregressive model (generating images pixel-by-pixel) instead of using diffusion technology like previous models. This approach enables better text creation, more accurate image iteration, and advanced stylization features - demonstrated by the author's ability to transform a cat photo into Studio Ghibli style. The new "Images in ChatGPT" feature is available across all subscription tiers.
· Google released Gemini 2.0 Flash native image generation two weeks before OpenAI's announcement, but with significant limitations: it's only available in the Gemini API and Google AI Studio, and doesn't support converting existing images to new styles. According to the author, while Google created impressive technology, they failed to deliver it as a user-friendly product - which is why OpenAI's release is generating more attention despite Google's recent Gemini 2.5 release.
· Amazon debuted "Interests," a new AI tool that matches customers with relevant products based on data profiles. The company is also introducing "Health AI," a GenAI app offering healthy living recommendations with direct integration to its pharmacy and One Medical telehealth services. In related news, Amazon created a new agentic AI group, seeing this technology as a potential significant revenue contributor for AWS in the future.
· PayPal faced speculation about possible EU tariffs as part of ongoing trade tensions, though this remains unsubstantiated as merely an idea from a single European government official. The analysis notes that countermeasures would be available given European competitors like Stripe and Adyen. Separately, PayPal announced reaching $30 billion in total small business loan originations, highlighting its growing lending business.
· Uber expanded its delivery network by adding Petco and Sally Beauty Holdings as new on-demand delivery partners, continuing its strategy to diversify beyond food delivery into retail merchandise.
· Meta is reportedly considering a $14 monthly subscription for an ad-free Instagram experience, which could help mitigate ad-based regulatory risks in Europe. The company also launched a new "Friends" tab on Facebook, functionally similar to the "Following" tab on X (formerly Twitter).
· CrowdStrike enhanced its security offering with new exposure management tools that include network vulnerability assessments. These tools promise to uncover and resolve network vulnerabilities "without additional scanners, agents or hardware," potentially reducing critical vulnerabilities by up to 98%. The capability integrates with Falcon Fusion SOAR platform for automated remediation, supporting vendor consolidation and cross-selling opportunities.
· Cava will be added to the S&P 400 MidCap ETF, a development that typically increases institutional investment exposure and trading liquidity.
By
Kristal Advisors
March 30, 2025
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