February 2025 Market Update
U.S. Equities suffered modest losses in February, with the S&P 500 index declining 1.3% and the Nasdaq Composite Index dropping nearly 2.7%. Despite the widespread expectation that yields would likely face upward pressure under some of the new administration’s policies, interest rates fell during the month, and bond prices outperformed stocks. Benchmark 10-year Treasury yields have now declined for seven consecutive weeks.
The flight to bonds in the back half of February accompanied a rotation towards defensive stocks and away from more cyclical sectors, representing some developing concerns around softer than expected U.S. economic data and the perceived growth implications of promised DOGE budget cuts. Within this rotation, the reversal of 2024 leadership from Magnificent 7 and Technology sector stocks continued with vigor. An equal-weighted basket of Magnificent 7 stocks declined nearly 10% for the month, and some investors may be surprised to learn that Technology has been the worst performing S&P 500 sector so far this year (and since the election). These two high-flying groups lagged the broader market again this month amid mounting concerns around the returns that significant AI investments will ultimately generate, set against the backdrop of extremely optimistic investor expectations. Thankfully, breadth was generally positive this month with the “average stock” experiencing smaller declines than the broad index.
This shift underscores the pitfalls associated with chasing “crowded” trades and ignoring market sectors and asset classes considered out of favor. U.S. Technology stocks have received an overwhelming majority of inflows over the past two years, and ownership of these names has become highly concentrated – even the slightest crack in a bullish narrative can cause a tempest when positioning and sentiment reach such extremes. On the other side of the spectrum sits Healthcare, which experienced some of its worst relative performance of the past 20 years in 2024 and was effectively ignored coming into the year. Thus far in 2025, Healthcare has generated the best year-to-date returns of any S&P 500 Sector! Similar dynamics can be observed in the Consumer Staples sector today, which remains unloved but did quietly outperform all other market sectors in February. These two sectors contribute a significantly higher percentage of aggregate S&P 500 earnings than their current market capitalization weighting in the index would suggest, which can signal undervaluation and potential opportunity.
Elsewhere, International stocks – particularly those domiciled in Europe or China – extended their year-to-date outperformance over U.S. stocks, a stark shift from the extreme outperformance registered by domestic equities for much of the past two years. The reversal of Dollar strength after an initial post-election surge and the potential for higher European deficit and defense spending to boost Eurozone growth has catalyzed this rotation. Chinese tech stocks have also seen a spike in performance and interest following the release of DeepSeek’s AI model, as global investors now see a more legitimate alternative to U.S. AI exposures.
While we have been watching U.S. markets closely for signs that domestic leadership is expanding, markets may be telling us that the broadening theme is more global in nature. Investors exited 2024 significantly underweight both European and Chinese equities while holding a pessimistic view of both markets in light of a possible trade war and various structural headwinds. As with some S&P 500 sectors that have been “left for dead,” it may not take much in the way of positive developments to drive additional inflows to these markets. Whether or not the “exceptionalism” we have grown accustomed to from U.S. markets stays intact this year remains an open question. Fundamentals and absolute outcomes certainly matter, but so do expectations and what today’s prices are already discounting.
Policy uncertainty is a hallmark of any new White House administration, and the 2025 Trump transition has been no exception. Mixed signals around trade and tariff negotiations, moving pieces on tax legislation, and uncertainty around the depth of budget cuts have introduced additional complexity to the outlook for all assets.
As a result, we have cautioned clients against becoming ensnared in the latest narrative du jour around what could unfold with policy. Initial trends forged immediately following an election often reverse course after inauguration day, and this is precisely the pattern that unfolded in the 4th quarter of 2016 into the 1st quarter of 2017. We have observed similar dynamics in 2025 across more than a few themes or sectors. Domestic Small-Cap stocks stand out as the most pronounced example, now down over 20% from their post-election highs, but we have seen similar head fakes from the Dollar and the direction of interest rates.
More generally, it is recognized that the President often takes a disruptive approach. Many of the current policy ideas are unprecedented and may present unanticipated upside or downside risks. Investors must remain humble and flexible to manage unexpected outcomes and would do well to keep their portfolio positioning untethered from personal political leanings.
Despite the elevated uncertainty and uptick in day-to-day volatility, U.S. stocks remain within striking distance of all-time highs. It seems the market will only react materially to news out of Washington once it begins to have a discernible impact on the visible outlook for corporate earnings. Many of the current discussions may not have an immediate effect on the corporate bottom line, and some may hope or anticipate that certain proposed policies will either not be implemented or are intended solely for negotiation purposes. Good businesses also won’t sit idly by as these changes occur. Many have various internal means to offset more challenging conditions; the ongoing surge in capital investments and productivity metrics across numerous market sectors may already reflect this to some degree. We recommend investors maintain their discipline and harness emotions. It is likely that corporate earnings and growth – not policy proposals – will dictate the medium-term direction of markets.
With this in mind, nearly all S&P 500 companies have reported 4th quarter earnings, and the results remain strong in aggregate. Per FactSet, earnings reported so far grew just over 18% compared to the same quarter in 2023, solidly beating expectations and marking the highest growth rate reported by the index since 2021.
More importantly, earnings growth is broadening to include a larger subset of contributors. The 493 S&P 500 stocks beyond the Magnificent 7 reported positive earnings growth in the 4th quarter for the first time since late 2022, while Mid-Caps also saw growth turn positive for the first time since 2022. Small-Cap growth remained negative, but analysts expect to see this group approach an inflection in the 1st quarter and shift to growth in subsequent quarters.
Zooming out, 10 of 11 S&P sectors are now estimated to post stronger earnings this year than last year. The only exception is Technology, which remains poised to grow at a high rate, just not as high as in 2024. We realize there exist numerous threats to these estimates that demand close attention, but this broadening is a welcome change following a two-year period in which only a narrow handful of stocks saw bottom line growth. Portfolio diversification may have a chance to produce better results going forward, now supported by more broadly improving fundamentals. In an environment where the large-cap growth-dominated indices trade at some of their highest valuations on record, the more reasonable multiples seen across recently lagging sectors and asset classes can also be supportive.
Thank you for your continued trust in our team, we hope you have had a productive start to 2025 and hope to hear from you soon! We are thinking of our clients who work in Federal government and remain sensitive to the uncertainty you are currently facing – please know that we are here to help in any way we can during this difficult time.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Wise Investor Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance may not be indicative of future results. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.
