March 11, 2025
After a strong start to 2025, February saw the return of volatility in the markets as tariff headlines dominated and investors moved to more risk off territory. The US equity markets corrected while bonds were positive with softening yields, reinforcing the role of bonds as a diversifier against equity losses. This, along with fading luster from the US exceptionalism narrative, was a reminder for investors on the importance of portfolio diversification and multi-asset investment. Growth/stagflation worries with softer economic readings and hotter inflation indicators, uncertainty around Trump’s trade/immigration and foreign policies and a cautious Fed amid a hotter CPI report and macro uncertainty all contributed with their share of volatility. February saw a decline in both business and consumer sentiment, with services activity and small business investment intentions falling, and consumer confidence posting its largest drop since August 2021. On the geopolitical front, February also saw a historic fallout in the Oval Office between President Trump and President Zelensky on Ukraine. The saving grace was stellar Q4 Corporate results with companies in the SCP 500 posting an average earnings growth of 17.8% over the same quarter a year earlier. The other positive surprise has been the spectacular performance of equity markets outside the US like Europe, UK, Switzerland and China that have had near double digit returns YTD far outpacing the US. Gold prices remained supported amidst political uncertainties while cryptocurrencies lost their winning crown as the month closed.
Economic data for January presented mixed results, with the hotter Consumer Price Inflation report fueling fears of recession and stagflation. The U.S. inflation rate rose to 3.00% in January, the highest level since May 2024. Core inflation remained stable at 3.26%. The U.S. Consumer Price Index increased by 0.47% month-over-month, while U.S. Personal Spending contracted for the first time since March 2023. The unemployment rate dropped to 4.0% in January, reaching its lowest point since May 2024, while the labor force participation rate increased slightly by 0.1 percentage point to 62.6%. Nonfarm payroll data revealed that the U.S. economy added 143,000 jobs in January, falling short of the expected 175,000 increase. The ISM services index missed expectations, while the ISM manufacturing index came in stronger. The U.S. economy remained firmly in growth mode toward the end of 2024, although the fourth quarter’s GDP figure came in slightly below most economists’ expectations. GDP expanded at an annual rate of 2.3% in the period, capping a year in which the economy recorded a 2.8% full-year growth rate, slightly below 2023’s 2.9% figure.
During the Congressional testimony Fed Chair Powell highlighted the ongoing need to address inflation and stated that Trump’s comments would not affect Fed policy decisions. He said that Fed policymakers need to see more progress in curbing inflation before considering further interest-rate cuts. Powell declined to specify the inflation rate that might trigger the Fed to approve a further cut in its benchmark rate, which has remained in a range of 4.25% to 4.50% since the last cut in December. Despite the defensive tone, there were positive developments, including the House GOP passing a budget resolution, January core PCE inflation meeting expectations, and Treasury support following the Fed’s indication of slowing or pausing QT mid- year. The next meeting is scheduled for March 18-19th, where investors expect the Fed Funds Rate to remain unchanged, according to the CME FedWatch tool.
Concerns over economic growth and consumer confidence led to growing expectations of additional Federal Reserve rate cuts, which led to large movements in the US Bond Yields. The yield of the 10-year U.S. Treasury note closed the month around 4.19%, a steep fall from the recent peak of 4.80% in mid-January. All major fixed income sectors posted positive returns in February, as falling US yields influenced other areas of the market. The Bloomberg Global Aggregate Index, which serves as a benchmark for investment-grade bonds in developed countries, rose by 1.2%. US Treasuries led the way with a return of 2.2%. Strong corporate fundamentals helped keep investment-grade spreads contained, and global investment-grade credit markets rose 1.6% for the month. In contrast, US high-yield bonds underperformed, posting a return of 0.6%, due to a slight widening in spreads and shorter duration.
Bond markets showed positive performance in both Europe and the United States, even though inflation in the U.S. continued to ease slowly. The shift in sentiment for government bonds was most pronounced in the US, where Treasuries outperformed their European counterparts. In Europe, growth optimism was supported by growing confidence in a potential ceasefire between Russia and Ukraine. However, concerns over increased government borrowing to fund defense investments led to European sovereign yields falling less than those in the US, with European government bonds returning 0.7% over the month. Inflation expectations for 2025 have risen notably among U.S. consumers and investors. Investors are now forecasting a Fed Funds rate of approximately 3.7% by the end of 2025 pricing in 3 rate cuts for the year. This, however, is a dynamic expectation that will keep changing with each incoming data and further fuel to the tariff war narrative.
Source Bloomberg: US 10Y Yield Chart 1 Year
The equity markets in February were rather skewed, there was significant variation across regions and sectors, largely driven by Trump’s announcement of new tariffs and drop in Consumer Confidence. As a result, US equity markets lagged, while Chinese and European indices saw positive gains. The underperformance of the MSCI US compared to the MSCI World ex-US reached -7.6% by the end of February, marking the largest calendar underperformance since 2006. The Nasdaq fell by -4.0%, and the Russell 2000 dropped sharply by -5.4% compared to the SCP500 decline of 1.4%.
The technology sector experienced a lot more volatility, particularly Nvidia, the poster boy of AI. Investors watched the earnings results closely expecting it to give direction to the AI-related stocks and the broader market, especially after the DeepSeek saga. However, despite solid results exceeding analysts’ expectations, with revenues surging nearly 80% year-on-year to
$39.3 billion for the quarter it failed to lift spirits. The Magnificent Seven stocks that were key drivers of the market in 2023 and 2024, posting a combined 156.1% return over those two years, compared to a 25.2% gain for the rest of the index, has not been able to hold the fort in 2025. While the SCP 500 is up 1.4% in the first two months of 2025, it is the balance 493 stocks that are keeping the index afloat. There was continued evidence of sector rotation within the index, as sectors such as consumer staples, energy, and real estate delivered healthy positive returns over the month. Overall, the communication services and consumer discretionary sectors were the worst performers, with returns of -4.2% and -9.0%, respectively. On the earnings front, US Corporates continue to be in solid shape with the blended earnings growth rate for Q4 SCP 500 EPS at 18.2%, exceeding the expected 11.9% according to FactSet data. The blended revenue growth rate is 5.3%. Of the 97% of SCP 500 companies that have reported, 75% have exceeded consensus EPS expectations, and 63% have surpassed consensus sales expectations.
European equities outperformed the US in February, finishing the month as the top-performing major equity index. The MSCI Europe ex-UK Index gained 3.4%, as investors increasingly priced in the likelihood of a ceasefire in Ukraine. European financials maintained their strong performance and emerged as the top-performing sector in the region, with returns on equity continuing to surpass those of their US counterparts. European defense stocks also benefited from the new world order and unfolding geopolitics, delivering a 9.3% return. The Swiss Performance Index also gained 2.4%. The UK’s FTSE 100 index also posted gains in February, supported by strong performances in the energy and financial sectors.
Asian shares rose 1.1% over the month, driven primarily by Chinese equities, which saw an 11.7% increase in dollar terms driven by optimism around artificial intelligence (AI) advancements and expectations of policy support. A renewed wave of optimism is sweeping through China’s AI industry, fueled by the notable success of DeepSeek, which has bolstered investor confidence in the Chinese information technology sector. Also, the high-profile meetings between Xi Jinping and senior business leaders suggested a more favorable regulatory environment and a more business-friendly stance from policymakers. Having said that, the concern over real estate continues causing GDP-sensitive domestic equities to lag the export-driver offshore market. Japan was a regional outlier, with the TOPIX posting a -3.8% return, as export-oriented market struggled amid a 2.8% appreciation of the yen against the dollar. The Indian equity index, the Nifty was one of the worst performers ending the month down -5.9%.While the low valuations of Chinese and European stocks may explain part of this rebound, concerns about the US economy’s resilience following the policy announcements—heightening uncertainty over inflation and growth—led investors to reduce their exposure to US equities.
Source: Goldman Sachs, March 2025
Supported by the Central Bank buying and the geopolitical uncertainties, gold hit a new high at
$2’948 before ending the month at $2’870, up 2.1% over the month. In contrast, oil prices saw a decline falling from $72 to $70.3 for WTI, notably due to a potential agreement between Russia and Ukraine. Major cryptocurrencies on the other hand experienced significant declines in February. Bitcoin dropped by almost 20% to 84,000 levels. At the end of January, Bitcoin was trading above $102,000. Ethereum too followed suit, falling by 29% to $2,305.32, now 52.1% below its all-time peak. In notable currency movements, the dollar fell against most currencies after a strong appreciation in 2024, with the DXY peaking at close to 110 levels in mid-January. The dollar lost 0.1% against the euro and 0.9% against the Swiss franc. The yen advanced +2.9% against the USD following rate hikes in Japan. The dollar trajectory will be heavily dependent on the Trump administration’s tariff announcements and is expected to be volatile.
Source Bloomberg: Bitcoin Price Chart 1 Year
While the fundamental economic backdrop remains broadly stable, investors need to be nimble and stand ready to pivot given uncertainty around economic transformation and U.S. policy. There has been a lot of noise with incoming information on U.S. policy lately leading to lot of volatility, markets await a concrete signal to adapt to. Amidst all this, the US Corporate strength seems to be one big positive ray of hope. However, having said that, with all this 2025 looks to be (at least for now) a year of Capital preservation. It is highly unlikely the US markets are going to reward investors with a stellar performance like the last two years. February was a strong reminder to investors of the power of diversification. The strong performance of European, Swiss and Chinese equities underscored the value of geographical diversification, while the positive returns in fixed income demonstrated that bonds can still serve as a hedge against equity losses. With the future direction of US tax and tariff policies—and their impact on inflation and growth— remaining uncertain, investors should maintain a diversified approach to protect their portfolios from potential volatility in the months ahead.
