Monthly Market Update for February 2025: Navigating Market Volatility

February brought significant ups and downs for stocks. The Magnificent 7 technology companies dropped 8.1% as the selloff that began in late December continued. Markets reacted to the new Trump administration's policy changes, with concerns about tariffs and inflation affecting growth outlook. While fourth quarter earnings reports were generally positive, mixed economic data and policy uncertainty led investors to seek safety in defensive sectors. During this volatility, bonds, particularly longer-term Treasury bonds, provided stability to investment portfolios.

Key Market and Economic Highlights

• The S&P 500 decreased 1.4% in February, while the Nasdaq fell 4.0% and the Dow Jones Industrial Average declined 1.6%. For the year so far, the S&P 500 remains up 1.2%, but the Nasdaq has lost 2.4%, erasing its earlier gains.
• The Aggregate Bond index rose 2.2%. The 10-year Treasury yield finished February at 4.2%, after reaching 4.6% during the month. 
• The Consumer Price Index showed inflation at 3.0% compared to last year, higher than expected and up from December's 2.9%.
• Retail sales dropped 0.9%, with online sales falling 1.9%. Household savings increased slightly to 4.6%, though this remains below the historical average of 6.2%.
• Bitcoin declined from its peak of over $102,000 at the start of February to approximately $84,000 by month-end.

Large tech stocks continue to impact market performance

February markets experienced turbulence due to policy announcements and renewed inflation worries, affecting both markets and consumer confidence. Despite the overall weakness, the S&P 500 actually hit new record highs during the month before pulling back. These market fluctuations may feel unsettling, but they represent a normal aspect of investing. Importantly, the downturn in stocks was partially offset by gains in bonds, highlighting why balanced portfolios are valuable. For those investing with a long-term perspective, maintaining focus on your financial objectives remains crucial.

Chart: Performance across multiple asset classes remains positive this year

The most notable market movements centered around major technology companies. The Magnificent 7 struggled despite several tech giants confirming substantial artificial intelligence investment plans and Nvidia reporting strong earnings. Investor concerns persist about growth prospects for these AI beneficiaries, particularly if new tariffs create additional production challenges.  

The recent market pullback has improved value in many market segments, though Information Technology and Communication Services sectors still trade at premium prices compared to their historical averages. Notably, all but two S&P 500 sectors maintain positive returns for the year. The leading sectors—Healthcare, Financials, and Consumer Staples—tend to be more defensive in nature.  

Bonds have contributed positively during this period. The 10-year Treasury yield ended February at 4.2%, more than one-third percentage point lower than at the month's beginning. When interest rates decline, existing bonds become more valuable because their higher yields are more attractive. This means when interest rates fall alongside stock market declines, bonds can help stabilize investment portfolios.  

As the chart above illustrates, both fixed income investments and international markets have outperformed the S&P 500 year-to-date. While the stock market, especially technology stocks, has performed strongly in recent years, February reminds us how important diversification across different market segments can be for managing risk through changing market conditions.

Inflation remains a primary concern for investors and consumers  

 Not surprisingly, inflation emerged as one of the main factors driving February's market volatility. The Consumer Price Index showed inflation returning to 3% for the first time since last summer. Other inflation measurements also indicated that prices across many categories remain more persistent than many economists had expected.  

 Chart: Consumer inflation expectations are rising

Expectations for future inflation have also increased among consumers. The combination of continuing rises in food and housing costs along with potential tariff impacts has consumers preparing for higher prices ahead. As shown in the chart, inflation expectations for the coming 12 months jumped significantly to 4.3% from January's 3.3%. Looking further ahead, these same consumers anticipate inflation averaging as high as 3.5% over the next five years.  

 The possibility of inflation resurging has unsettled some investors. Beyond their economic and market impacts, higher prices create uncertainty around Federal Reserve policy decisions. If inflation remains stubborn, the Fed might need to maintain higher interest rates for an extended period.  

 Earnings reports provide encouraging news  

 Despite economic and market concerns, corporate earnings continue to show strength. According to FactSet, earnings-per-share growth reached 18.2% compared to last year, the highest since 2021. This earnings season featured widespread growth across different sectors and expanding profit margins, both indicators of economic health. About 75% of companies exceeded analysts' earnings expectations, matching the 10-year average, though the magnitude of these positive surprises was greater than the 10-year average.  

 Chart: Stock market performance follows corporate earnings over time 

Over the long term, growing corporate profits drive financial markets higher, regardless of daily headlines or investor concerns. Current Wall Street projections suggest S&P 500 earnings-per-share could reach $266 this year, representing 12% growth. While much could change in the months ahead, focusing on fundamental factors like earnings is far more important than reacting to day-to-day news.  

The bottom line? Stay disciplined as markets respond to tariffs, inflation concerns, AI developments, and other factors. Stock market swings are a natural part of investing. Those who maintain balanced portfolios and stay focused on long-term goals have historically been better positioned for financial success.