Monthly Market Update – February 2025

Key Points

• TGINF Thank Goodness It’s Not February! U.S. stocks took a hit in February, with the S&P 500 Index dropping -1.4% amid weak seasonality, tariff uncertainties, high valuations, and fears of an economic slowdown. The Russell 2000 sank even further, with a -5.3% decline for the month. 
• DIVERSIFICATION SCORES On the bright side, diversification paid off as bonds rallied with the Bloomberg U.S. Aggregate Bond Index up +2.2% in February, and international stocks, like the MSCI EAFE Index, advancing +1.8%. It was the first month in years that U.S. bonds were positive when U.S. stocks were negative.
• SPRING SEASONALITY In February, U.S. equities began on a promising note but succumbed to declines by the month’s end. However, the outlook for March and April appears optimistic; data reveals that this two-month span has historically been the second most favorable period for equity performance since World War II.  
• UNCERTAINTY REIGNS Goldman Sachs highlights the significant shifts in economic policy following the election of President Trump, whose administration has quickly acted on policy regarding trade, immigration, and deregulation. The pivot in policy has resulted in a substantial rise in Economic Policy Uncertainty that has already exceeded the levels during his first term.  
• NOT-SO-MAGNIFICENT SEVEN After impressive market-dominating performance in 2023 and 2024, the Magnificent Seven stocks—Apple, Amazon, Alphabet, Meta Platforms, Microsoft, NVIDIA, and Tesla—have suddenly found themselves down more than -5% in 2025 and lagging the broader market which is up +5%. This may reflect the heavy international revenue exposure they have relative to the broader market.
• GROWTH SCARE The markets had strong momentum coming into 2025, but the optimism began to wane as February progressed. “Soft data” such as Consumer Confidence and Consumer Sentiment fell more than expected. However, “hard data” such as employment figures and production output continue to portray a resilient economy. Overall, the economic landscape remains clouded by uncertainty and more data and more clarity on trade policy is needed to determine if the market decline is a routine pullback or a reflection of a deeper economic slowdown.
• EARNINGS SEASON The 2024 fourth quarter earnings season is showing a notable Earnings Per Share (EPS) beat rate of 70.4%, placing it among the top 7% of earnings seasons historically and the best quarter since the second quarter of 2021. Looking ahead, consensus estimates suggest a projected 10% increase in S&P 500 EPS for 2025, underscoring optimism about corporate profitability even in light of questionable tariff impacts.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of February 28, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

TGINF – Thank Goodness It’s Not February! That’s certainly a sentiment many equity investors are expressing. The month actually started out well for investors with the S&P 500 Index reaching two all-time highs in the first week. But the month lived up to its reputation as one of the poorer performing months of the year—in fact, it’s the second worst month behind September (see the “March Seasonality” section below for more information on that). The combination of historically weak seasonality, tariff policy uncertainty, high valuations, poor weather across the nation, and concerns about a slowing economy all contributed to U.S. stocks falling in February. Unfortunately, many of those market conditions will carry into at least the first half of March as well. The headline S&P 500 Index fell -1.4% in February, or a total return of -1.3% with dividends reinvested. It was just the fourth negative month in the last 16 for the S&P and leaves it about -3.1% below its February 13 record closing price. 

From a sector perspective, it was a mixed picture, with six sectors positive and five negative. Unfortunately, some of the bigger sectors in the index were negative, weighing the overall index into the red for the month. Sectors like Information Technology, Communication Services, and Consumer Discretionary were among the largest decliners in February after powering the index higher over the last year. Technology was down -1.4% and is the largest sector of the index, representing more than 30% of the market capitalization. Communication Services is about 9% of the index and dropped -6.3% for the month and Consumer Discretionary is 10% of the index and sank -9.4% in February. For both Communication Services and Consumer Discretionary it was the worst single month since December 2022. However, even after the tough declines in February the sectors are still up more than +17% (Discretionary), +18% (Technology), and +29% (Services) over the last year. The biggest gainers for the month were Consumer Staples (+5.7%), Real Estate (+4.2%), and Energy (+4.0%), but they are only weights of 6.0%, 3.5% and 2.3% respectively.

Small companies fared much worse than large companies in February. The Russell 2000 Index was down -5.3% on a total return basis in February. It was the third monthly decline in five months for the small cap index, leaving it down nearly -11% (with dividends reinvested) in the last three months. After a big outperformance over large caps (the S&P 500) in November, small caps have underperformed in each of the three months since. Small cap stocks were expected to gain some tailwinds with the Trump administration in anticipation of deregulation, lower interest rates, and less downside from potential tariffs (small cap stocks are much more domestically concentrated). The recent slide in small cap stocks likely reflects concerns about an economic slowdown, an environment in which smaller companies tend to struggle more. 

Outside of U.S. stocks however, most broad asset classes saw gains in February. It has been a while since the benefits of diversification have been so evident. In addition to providing income, one of the primary benefits of bonds is to provide a ballast for portfolios when stocks struggle. But with interest rates near zero in 2020 following the pandemic, and then rising as the Federal Reserve (the Fed) fought inflation in 2022 and 2023, bonds regularly underperformed stocks. But in February, following weeks of yields declining, the widely tracked Bloomberg U.S. Aggregate Bond Index (the Agg), which includes investment-grade corporate bonds and mortgage-backed securities as well as Treasurys, returned +2.2%. It was the best month for the index since last July and the 8th month in the last 10 that the U.S. bond benchmark has risen. It was the largest outperformance of bonds over stocks (the Agg returned +3.5% more than the S&P in February) since December 2022. But even more notable, February was the first month since November 2021 that U.S. bonds were positive when the S&P 500 was negative. 

In addition to bonds, developed and emerging international equities also contributed positively to diversified portfolios. The MSCI EAFE Index (developed market international stocks) was up +1.8% in February after a healthy +5.2% gain in January. February beat January as the best month of outperformance for the MSCI EAFE over the S&P 500 since December 2022. It was the first month since December 2022 that the MSCI EAFE Index was positive when the S&P was negative. Again, a welcome result for diversified investors.

Source: Bloomberg. Data as of February 28, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

SPRING SEASONALITY

For U.S. equities, February started strong but ended weak. Headlines during the month pointed to a number of factors contributing to the weakness, including inflation worries, tariff policy, growth concerns, and even unseasonably cold weather. But seasonal trends may have also been an underlying cause. Along with September, February is the only other month of the year where the S&P 500 has average declines over the long term. Analysis by Bespoke Investment Group also shows that February ranks as the second-worst month of the year in terms of average returns. Thank goodness it is now behind us. Looking ahead to March and April, since World War II (WWII) and over the last 25 years (since 2000), the upcoming two-month period has been the second best two-month period of the year, trailing only November to December since WWII and October to November over the last 25 years. And when the S&P 500 was up less than +5% through February, the median March performance was a gain of +0.8%, while the median rest-of-year gain was +10.8%. March hasn’t shown to be much better than February yet, and it tends to be soft in the first half of the month in post-elections years, but historically has shown strength in the back half of the month.

Will Seasonality Help Spring the Market Up

S&P 500 Average Monthly Performance (%)

Source: Bespoke Investment Group.

UNCERTAINTY REIGNS

Goldman Sachs points out that every change in administration creates change in policy. So far in 2025, the Trump administration has been swift to act on key focus areas such as trade, immigration, and deregulation. Goldman’s data shows that Economic Policy Uncertainty has elevated sharply, reflecting risks of higher tariffs in coming months. Increased tariff rates could have material impact on U.S. growth and inflation, though Goldman expects a larger growth drag in Europe and China. President Trump has already proposed more tariffs during his first month in office than during his entire first term. According to Goldman estimates, more than $1.9 trillion in goods are subject to potential tariffs, with a particular focus on critical imports such as industrial materials, semiconductors, and pharmaceuticals. The U.S Trade Representative and Department of Commerce are undertaking a holistic review of U.S. trade with a report due at the beginning of April. Details, including effective tariff dates, are expected to be announced at that time. Until that report is available, policy uncertainty is likely to remain elevated with the Trump Administration continuing to announce tariffs without any immediate corresponding specifics with regards to coverage, timing, and measurement.

Elevated Policy Uncertainty

U.S. Daily Economic Policy Uncertainty Index (5-day rolling average)

Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management. As of February 26, 2025.

NOT-SO-MAGNIFICENT SEVEN

The Magnificent Seven stocks (Apple, Amazon, Alphabet, Meta Platforms, Microsoft, NVIDIA, and Tesla) powered the market higher in 2023 and 2024. The S&P 500 overall was up +53.2% over calendar years 2023 and 2024. But over that two-year span, the Magnificent Seven combined were up a staggering +156.1%, while the remaining S&P 493 (the S&P 500 minus the Magnificent Seven) had a gain of +25.2% for the same two year period. However, the tables may be turning in 2025. Though the S&P 500 was up +1.4% through the first two months in 2025, it’s the broader S&P 493 that is keeping the overall index positive as the Magnificent Seven is in a pullback. The chart below shows a potential shift in market leadership away from the Magnificent Seven, down -5.7% year to date, and a market rotation into the broader S&P 493, up +5.1% year to date. The just discussed tariff uncertainty may be playing a big role in that rotation. About 49% of the revenue of the Magnificent Seven companies are derived from outside the U.S. making the mega-cap multinational companies particularly vulnerable to reciprocal tariffs. For comparison, the remaining S&P 493 have about 26% of their sales derived outside the U.S. and the small cap Russell 2000 Index has just 21% of its revenue sourced outside the U.S.

Have the Tables Turned in 2025

It’s early, but 2025 has seen a rotation from the Mag 7 to the S&P 493

Source: YCharts. Data range: 1/1/2025 – 2/28/2025.

GROWTH SCARE

Markets started 2025 with a lot of momentum and investor sentiment was optimistic that the good times could continue with a boost from a new administration pushing market-friendly tax cuts and regulatory relief. But as February progressed, trade tensions and signs of slowing growth began to emerge and erode investor confidence. The Trump administration appeared to remain committed to imposing 25% tariffs on Canadian and Mexican imports, as well as 10% tariffs on Chinese goods. Though there appears to be some possibility that certain product categories, such as automobiles, may be excluded or that the tariffs could be further postponed, markets still are reacting very uneasily about the direction of trade policy. At the same time economic jitters began to appear, but it has largely been confined to the so-called “soft data” such as consumer surveys. They tend to be more volatile, influenced by news, and less predictive of real economic activity. For example, the Conference Board’s Consumer-Confidence Index, posted its largest monthly decline in February since 2021. Likewise, the University of Michigan’s Consumer Sentiment for February dropped to its lowest level since November 2023. However, the same softening soft data may just be a reversal of big postelection spikes. Other economists have pointed to the coldest January in the contiguous U.S. in three decades (Source: NOAA National Centers for Environmental Information), and the California wildfires, as contributors to the slump in soft data.  Meanwhile the “hard data”, like employment and production output, continues to show an economy chugging along at a healthy pace. Durable Goods and Nondefense Capital Goods Orders, released at the end of February for January activity, logged healthy increases. Industrial Production output also picked up in January, exceeding Wall Street expectations. However, pessimists would point to the hard data just showing companies boosting activity to front-run tariffs. The bottom line is that uncertainty will likely prevail until more data emerges and more details on trade policy are formally announced. Until then there is likely to be a lot of noise in both soft and hard data.

Industrial Production Logged the Biggest Rise Since October 2022

It’s early, but 2025 has seen a rotation from the Mag 7 to the S&P 493

Source: Federal Reserve, Trading Economics. Data range: Jan 2022 – Jan 2025.

EARNINGS SEASON

With more than 1,400 companies reported so far for the 4Q-2024 earnings period, earnings and revenue results have been strong. As shown in the chart below, the Earning Per Share (EPS) beat rate (exceeding Wall Street analysts’ consensus estimates) of 70.4% is in the top 7% of all earnings seasons historically and the highest since 2Q- 2021. Meanwhile, the revenue beat rate also accelerated higher over the last couple of quarters, and at 65.8% for 4Q-2025, it is in the top 20% of all periods since 2001. By nature, earnings and revenue reports are a backward looking indicator, so the strong results and beat rates don’t necessarily tell us much about what may happen over the next few quarters. But despite economic uncertainties, consensus estimates forecast a robust 10% earnings increase in S&P 500 earnings per share for 2025, and 12% for 2026, suggesting resilience in corporate America. And despite the correction in small cap stocks, the consensus earnings estimates for the Russell 2000 Index are expected to grow 36% in 2025 and 35% in 2026. Even if tariffs negatively impact earnings growth rates by a couple or few percentage points, they would still be at or ahead of 2023 and 2024 earnings rates.

Percent of Companies Beating Earnings and Revenue Estimates by Quarter

% of Fourth Quarter 2024 Earnings and Revenue Reports Beating Analysts’ Estimates

Source: Bespoke Investment Group.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.