Sophomore Slump
March 10, 2025
After notching all-time highs intra-month, equity markets fell off considerably to close lower in February, with the S&P500 declining -1.3% for its second negative month in the last three. Weakness was seen especially in technology and other economically sensitive small-cap areas, while defensive sectors like energy and utilities held up well. Continuing the emerging 2025 trends, International stocks (both developed and emerging) outpaced US markets, and the equally weighted S&P index exceeded its market-cap weighted counterpart. Treasury yields fell and safe-haven assets such as gold posted strong gains in the flight to safety. Volatility spiked with the VIX index rising above 20 and holding, a clear signal of market anxiety.
This plunge in sentiment was a result of several bearish themes. Inflation angst intensified, as February’s CPI report showed rising prices which spooked investors and underscored the need for more Fed work to combat sticky inflation. Uncertainty around trade policy also came to the fore, as President Trump expanded his previously announced tariffs to include an additional 25% on vehicle imports, with potential further duties targeting the semiconductor and pharmaceutical industries. Investors are understandably weighing the potential impacts of these aggressive policies, with many economists expecting lower growth and/or higher future inflation. To add insult to injury, economic growth concerns emerged as the both the Conference Board Index and Purchasing Manufacturers Index for services contracted steeply. Risk off, risk off.
Despite the challenging month, there were glimmers of hopes for bulls to hold onto. Corporate earnings growth has shown remarkable resilience, with 75% of reporting S&P500 companies posting positive earnings surprises and 63% exceeding revenue expectations. The blended Q4 earnings growth rate sits at 18.2%, far exceeding market expectations of 11.9% and marking the strongest quarterly performance in over three years. Expectations for 2025 remain high, and if they are met – or exceeded – we could see strong earnings provide some much-needed fundamental support for the post-election rally to continue.
An additional pillar of support could take the form of a lower interest rate environment. During February, Fed Chair Powell testified before Congress and despite comments on holding short-term rates steady, longer-term bond yields fell steadily during the month. Although short-term rates continue to grapple with mixed inflation and labor-market data, the 10-year treasury yield has quietly declined from a peak of 4.79% in January to 4.2% by the end of February. These declining yields supported fixed income returns during the month, which were broadly positive. More importantly, they served as a counterweight to the broad sentiment decline seen in the equity markets and provided ballast to diversified and more bond-heavy allocations.
A quick note here on an important word in the preceding sentence: diversified. For much of recent market history, diversification as an allocation principle has not been overly rewarded. As market breadth and concentration has narrowed it has been a smaller and smaller subset of markets, sectors, and companies that have propelled the market onward, while other neglected sectors have lagged. Often, diversification has felt disappointing. But in recent months, diversification has been well rewarded as market dynamics have shifted and different assets have begun to move in different directions.
We saw that in clear relief during February’s turbulence as technology and risky segments sold off while international stocks, bonds, and more defensive stocks held up. This is a welcome reminder that diversification remains a solid principle around which to construct a portfolio. Spreading allocations across a variety of asset classes, geographies, and vehicles is an effective strategy to reduce the idiosyncratic risk of having a lot of eggs in a single basket. This helps to smooth out what might otherwise be a bumpy ride, which is exactly what we saw in February. Diversification is the bedrock of our asset allocation process at Boston Wealth Strategies, one that we stick with across all market environments, and one that we feel will serve us (and our clients) well into the future. February’s sell-off has provided a welcome reminder of this fact.
Next month we have the usual slew of economic releases, as well as the FOMC meeting on the 19th. We will be watching closely and will keep you posted as developments arise. As ever, we sincerely appreciate your trust and support.
Sincerely,
Jason D. Edinger
Chief Investment Officer
Boston Wealth Strategies
* Disclosure: Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.