Monthly Market Update - February 2025

Countiss Wealth Management. Monthly Market Update - February 2025. https://www.youtube.com/watch?v=nHUYhnaUKOA

Summary:

February 2025 saw market volatility driven by AI rallies, inflation, and trade tensions. The S&P 500 declined as key sectors fell, while small-cap stocks struggled. New tariffs from President Trump fueled inflation fears, deepening the yield curve inversion. International markets outperformed, with China surging 11.8%. As March begins, investors focus on Fed policy, AI momentum, and corporate earnings. With inflation high and volatility expected, a diversified, risk-conscious approach is key.

Chart 1: S&P 500 Breakdown

February 2025 was a turbulent month for investors, as markets grappled with AI-driven rallies, persistent inflation, and renewed trade tensions. While the S&P 500 ended the month lower, only four of the 11 sectors declined—but they happened to be the most heavily weighted in the index.

The month began with a sharp sell-off after President Trump announced new tariffs on Mexico, Canada, and China, reigniting inflation concerns. Tech and industrial stocks trended mostly downward, while mid- and small-cap stocks saw steeper declines than their larger counterparts, as tighter financial conditions led investors to shy away from smaller, domestically focused companies. 

Chart 2: Yield Curve

Walmart’s cautious outlook, combined with weaker retail sales and a hotter-than-expected inflation report, deepened the yield curve inversion. This occurred because the Fed may need to adopt a more hawkish stance to combat inflation, pushing short-term Treasury yields higher, even as signs of a slowing economy put downward pressure on long-term yields.

International Markets

Outside the U.S., developed market stocks outperformed, with the MSCI EAFE Index rising 2.0%, led by gains in European economies. Emerging markets saw more muted performance, climbing just 0.5%, as most markets declined. However, a strong 11.8% surge in Chinese equities helped offset broader weakness.

As markets move into March, investors are closely watching the Fed’s policy direction, the momentum in AI stocks, and the impact of trade tensions on corporate earnings. With inflation remaining stubbornly high and expectations for rate cuts shifting further out, volatility is likely to persist. The upcoming first-quarter earnings season will offer deeper insights into corporate resilience, while inflation data will be key in assessing whether price pressures are easing. Given the heightened uncertainty across sectors, maintaining a diversified and risk-conscious approach will be crucial in the months ahead.