Once Upon a Market - February 2025

February was a turbulent month for markets as the recent technology selloff deepened and new trade war concerns surfaced. The Magnificent 7 continued their decline, falling 8.1% during the month, contributing to broader stock market volatility. Inflation fears persisted as consumer prices edged higher, and new tariffs from the Trump administration reignited uncertainty. While fourth-quarter corporate earnings remained a bright spot, mixed economic data and policy changes weighed on investor sentiment. Bonds played a stabilizing role, especially longer-duration Treasuries, as interest rates fluctuated throughout the month.

Key Market and Economic Drivers

Equities: The S&P 500 fell 1.4% in February, while the Nasdaq dropped 4.0%, giving up its early-year gains. The Dow Jones declined 1.6%. Despite recent volatility, the S&P 500 remains up 1.2% year-to-date.
Bonds: The Aggregate Bond Index gained 2.2%, supported by falling yields. The 10-year Treasury yield ended the month at 4.2%, after touching a high of 4.6% mid-month.
Inflation: The Consumer Price Index (CPI) rose 3.0% year-over-year, higher than expected and accelerating from 2.9% in December.
Consumer Activity: Retail sales fell 0.9%, with a 1.9% decline in online sales. The household savings rate rose slightly to 4.6%, still below the historical average of 6.2%.
Cryptocurrency: Bitcoin declined sharply, falling from $102,000 to $84,000, as market risk appetite weakened.

Markets React to Trade War Developments

One of the most significant drivers of market volatility in late February was the escalation of trade tensions. The Trump administration confirmed new tariffs on Canada, Mexico, and China, triggering market fears of rising costs and slowing economic growth. With additional tariffs expected in the coming months—alongside potential retaliation from trading partners—investors are concerned about the potential impact on corporate margins and inflation.

Why tariffs matter:

Higher costs: Tariffs act as a tax on imported goods, which can drive up prices for both businesses and consumers.
Inflation concerns: With CPI already running hotter than expected, tariffs could exacerbate inflationary pressures, delaying potential Federal Reserve rate cuts.
Corporate uncertainty: Companies face increased costs and supply chain disruptions, potentially impacting future earnings growth.

While trade war concerns have led to a 5.7% drop in the S&P 500 over seven trading days, history suggests that market reactions to tariffs often prove more dramatic than their actual economic impact. Previous rounds of tariffs in 2017-2019 caused short-term volatility but ultimately led to new trade agreements and economic adjustments.

The Magnificent 7 and Sector Rotation

Despite overall earnings strength, large-cap technology stocks remained under pressure. Investors continue to question the growth potential of AI-driven firms, particularly as supply chain risks from tariffs mount. Even with strong Nvidia earnings and AI investment announcements, the group struggled to maintain momentum.

While tech stocks declined, defensive sectors such as Healthcare, Financials, and Consumer Staples outperformed, demonstrating the benefit of diversification. All but two S&P 500 sectors remain positive year-to-date, highlighting resilience in different areas of the market.

Bonds provided balance amid the stock market swings. As the 10-year Treasury yield fell from 4.6% to 4.2%, bond prices increased, helping stabilize portfolios. This underscores the importance of holding a diversified mix of assets, especially during uncertain market conditions.

Consumer Confidence and Inflation Expectations

Rising inflation remains a concern for both consumers and policymakers. In addition to the 3.0% CPI increase, consumer surveys show expectations for future inflation jumping to 4.3% from 3.3% in January. Over the next five years, consumers expect average inflation at 3.5%, higher than previous forecasts.

Higher inflation expectations create uncertainty around Federal Reserve policy. While markets had anticipated potential rate cuts later this year, persistent inflation could force the Fed to keep rates higher for longer.

Corporate Earnings Remain a Bright Spot

Despite inflation and policy concerns, corporate earnings growth remains strong, providing a counterbalance to broader market volatility:

Earnings per share (EPS) growth: 18.2% year-over-year, the highest since 2021.
Surpassing expectations: 75% of companies beat earnings estimates, exceeding the 10-year average.
Profit margins expanding: Strong revenue growth and cost efficiencies are boosting corporate profitability.

In the long run, corporate earnings drive stock market performance more than short-term headlines. Wall Street analysts project S&P 500 EPS to grow by 12% in 2025, suggesting potential upside for patient investors.

Long-Term Investing Through Market Volatility

Market pullbacks are a normal part of investing. While the S&P 500 has declined 5.7% in just seven trading days, similar pullbacks have occurred multiple times in recent years:

Twice in 2024
Three times in 2023
Over a dozen times during the 2022 bear market

With markets near all-time highs just weeks ago, many investors had become accustomed to steady gains. However, history shows that maintaining a disciplined, long-term approach is the best way to navigate market volatility. Staying invested, diversified, and focused on fundamental factors like earnings growth, employment strength, and productivity trends leads to better financial outcomes over time.

The Bottom Line

Tariffs and inflation concerns have rattled markets, leading to a pullback in major indices.
Technology stocks remain under pressure, but defensive sectors and bonds have provided stability.
Corporate earnings growth remains strong, reinforcing the long-term outlook for investors.
Market pullbacks are normal, and history shows that a long-term approach remains the most effective way to navigate uncertainty.

While trade war headlines will likely continue in the coming months, it’s crucial to stay focused on your financial goals, portfolio diversification, and the fundamental drivers of market performance. Staying invested through market cycles has historically rewarded disciplined investors, and this time is no different.

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