Table of Contents
Macro Insights
Confidence Falters, Volatility Rises
Stocks fell in February, with the S&P 500 declining 1.4%, led lower by technology stocks and the "Magnificent 7" trade. Notably, Tesla (-27.6%) and Google (-16.5%) posted steep losses. The CBOE Volatility Index (VIX) surged above 20 near month-end for the first time this year. The Nasdaq dropped 4%, marking its worst month since April 2024. Market weakness was driven by softer economic data, stubborn inflation, uncertainty surrounding the Trump administration’s tariff policies, and lingering concerns over AI spending durability. This month’s Spotlight examines persistently high valuations despite these risks.
Federal Reserve (Fed) Chair Powell’s Senate testimony reiterated that recent inflation data suggests the Fed “has more work to do” to control rising prices. This, combined with weaker economic indicators, shook investor confidence, particularly as the economic impact of new trade policies (supposedly going into effect in the coming days) has yet to be felt. The mega-cap tech trade, particularly those more notably tied to AI, was weak on the month. While cloud service providers maintained capex guidance in line with expectations, Microsoft CEO Satya Nadella’s recent comments on a potential overbuild in AI infrastructure further dampened sentiment following the prior month’s shockwaves from DeepSeek.
Bond markets reflected a risk-off shift, with the 10-year Treasury yield falling over 30 basis points to 4.2% by month-end, down from a mid-January high of 4.8%. Early February employment data revealed weaker job growth but higher-than-expected wage gains, a combination that signals slower economic growth with persistent inflation risks. Looking ahead, markets have increased expectations for Fed rate cuts, now pricing in 60 basis points of additional cuts this year as economic concerns outweigh inflation fears.
Despite economic uncertainty, corporate profits remained strong. With the Q4 earnings season nearly complete, revenue growth beat expectations by 1%, while earnings outperformed by 7%, exceeding the prior two quarters. Many data points continue to highlight resilience in the U.S. consumer, though Walmart’s disappointing guidance highlighted a shift toward essential purchases over discretionary spending, raising questions about consumer durability.
The “Magnificent 7” mega-cap stocks have been a key driver of market gains over the past two years, contributing roughly half of the S&P 500’s returns. While the S&P 500 remains up 1.4% year-to-date, international markets have outperformed, largely due to the U.S. market’s heavy tech concentration. We will continue to closely monitor developments relating to the implementation of tariffs as well as unfolding economic data to assess the trajectory for corporate profits and the Fed.
Magnificent 7 vs. Equal Weighted S&P 500
Outside of the Mag 7, S&P 500 stocks are largely up this year.
2025 RETURNS
Source: Fort Washington and Bloomberg.
What to Watch
Inflation data continues to drive Fed expectations, impacting yields and interest rate-sensitive equities. Consumer sentiment declined in recent reports. As a result, investors will monitor that data for a potential change from the current trend.
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Monthly Spotlight
Investing Through Elevated Uncertainty
Investing has always involved uncertainty, but today’s landscape presents an elevated level of ambiguity across multiple fronts. From shifting economic policies to technological disruptions and elevated market valuations, investors must navigate a complex environment that demands a careful understanding of risks. Despite these heightened uncertainties, equity and fixed income markets reflect a strong risk appetite, raising important questions about sustainability and prudent portfolio positioning.
One major source of uncertainty is the evolving policy landscape, both domestically and globally. Rapid shifts in tax policies, trade agreements, and regulatory frameworks create volatility for corporate decision-making and unsettle consumer confidence. Geopolitical tensions, particularly between the world’s largest economies, further complicate long-term planning by disrupting supply chains and introducing variability for input prices. At the same time, central banks face the delicate task of normalizing monetary policy after a period of restrictive measures.
Beyond macroeconomic concerns, the rapid evolution of Artificial Intelligence (AI) introduces another layer of complexity. While AI-driven investments have fueled market leadership over the past two years, the timing and impact on productivity are still unclear. Investors are tasked with weighing both the opportunities AI presents for economic gains and the potential disruptions it could create across industries.
Despite these challenges, markets have largely embraced a risk-on sentiment. Credit spreads remain historically tight, and the S&P 500 has surged 50%+ over the past two years, resulting in rich valuations across both asset classes. Investment-grade corporate spreads have only been this expensive 10% of the time since the early 1990s, and high-yield spreads are hovering near record lows. While valuations can stay elevated for extended periods, history suggests that risk-adjusted returns can be constrained when asset prices approach these levels.
In today’s backdrop of mounting uncertainties and potential risks, we believe now is a critical time for prudent portfolio management. Investors should focus on maintaining diversification as well as re-evaluate portfolio allocations to ensure alignment with risk tolerances and long-term goals. Investor success in this environment will depend on understanding over- and underweight exposures, both intentional and unintentional, and how those are influenced by a variety of risks.
Current Outlook
Market Data & Performance
As of 02/28/2025
TOTAL RETURNS
Source: Fort Washington and Bloomberg. *Returns longer than 1 year are annualized. Past performance is not indicative of future results.
