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Stocks: More Bricks In The Wall Of Worry

2025 de marzo

The S&P 500 and small-cap Russell 2000 index closed out February with monthly losses of 1.3% and 5.3%, respectively, as sagging consumer confidence contributed to fears of a ‘growth scare,’ or perhaps something worse, lying in wait. It became apparent as February ended that consumers, corporations, and investors were growing increasingly skittish and taking on a more defensive posture by building up savings/cash while reducing spending/investment in the face of rising geopolitical angst, government layoffs, and ongoing trade uncertainty. With consumer spending accounting for roughly two-thirds of GDP, households tightening purse strings in preparation of higher prices from tariffs would likely tamp down earnings growth in the coming quarters. And with corporations unwilling to invest or engage in mergers and acquisitions due to a lack of clarity on the trade and regulatory fronts, business spending can’t be relied upon to pick up the slack for a more cautious U.S. consumer. At the same time, rapid-fire cutbacks in federal government employment and spending added another layer of uncertainty for households and businesses to contend with, in part because the effects of these cutbacks will spill over into the private sector.

Shaky investor sentiment was evident in the American Association of Individual Investors (AAII) weekly investor survey. Pessimism ruled the day, with 60.6% of respondents ‘bearish’ on stocks over the next six months in the February 26 poll. The percentage of ‘bearish’ respondents is almost twice the historical average of 31% and was last higher on September 29, 2022. Interestingly, that level of bearishness in the September 2022 survey proved to be an opportune time to buy as the S&P 500 rallied 5.5% in the three months to follow and 17.7% in the next year. While we would love it if history repeated and the S&P 500 turned out similar returns in the next 3- and 12- months, other guideposts, specifically the muted response out of the CBOE Volatility Index (VIX) and defensive leadership profile, lead us to believe that ‘peak pessimism’ and additional downside in U.S. stocks may still lie ahead.

VIX measures 30-day implied S&P 500 volatility and is calculated based on demand for 10% out-of-the-money puts, or options that rise in price as stock prices fall, relative to 10% out-of-the-money calls, or bets that stocks will move higher. A VIX reading of 20 or less is indicative of limited demand for hedges against a market drawdown and has been quite common in recent years as pullbacks have been shallow and short-lived. A spike in the VIX tends to coincide with a selling crescendo or sentiment ‘flush’ which can correspond with market bottoms. VIX entered March below 20, a potential sign of complacency surrounding whether tariffs would be levied or not. A VIX spike to 30 or above, a level last seen in August 2024, would be more indicative of peak pessimism and give us comfort that a market bottom is close, if not in place. VIX was hovering in the mid-20’s in early March as tariffs went into effect on Canada, China, and Mexico, so we are likely closer to a level where those needing to sell to de-risk have already done so. That said, it would be unusual to see the market bottom with so few S&P 500 constituents trading below their short-term moving averages.

Market breadth didn’t signal a rush to the exits at month-end as over 50% of S&P 500 constituents remained above their 10, 50, and 200-day moving averages. But the Index still pulled back despite decent participation, shining a light on concentration risk as the ‘Magnificent 7’ is still dictating the direction of travel for the S&P 500. An equally weighted basket of this anointed group of stocks fell 8.5% in February, making it a tough ask for the remaining 493 names to offset such a sizable drop. As of early March, six of the Mag 7 – with Apple the lone exception - were down 10% or more from their all-time high and most were trading in oversold territory based on relative strength indicators (RSI). This backdrop could bring about a near-term bounce, but near-term upside could be limited as prior support levels may now become upside resistance. The S&P 500 was testing support at its 200-day moving average around 5,730 in early March and if this level holds buyers could be emboldened to step back in, and the 100-day moving average at 5,950 is the first upside target worth watching as seasonals become more supportive.

Sector leadership struck a ‘risk-off’ tone in February due to economic and policy uncertainty, with consumer staples (+5.7%), health care (+1.3%), and utilities (+1.1%) each outperforming the S&P 500 during the month. But the energy (+3.2%), financial services (+1.2%), and real estate (+4.1%) sectors - all economically sensitive to some degree- outperformed the S&P 500 as well, confounding investors positioning for an economic slowdown. The sector leadership profile has shifted in a decidedly defensive direction in March as energy and financial services succumbed to selling pressure and have given back February’s gains plus some. With quarterly earnings season behind us, the path taken by U.S. stocks will be beholden to headlines and the macro backdrop, a potentially disconcerting combination. With few positive catalysts to speak of outside of an unlikely about-face on tariffs, economic surprises are likely to skew to the downside. However, the seasonal backdrop has historically turned more supportive for U.S. stocks in mid-March through May, and with the S&P 500 now oversold, a bounce should be expected, it’s just a matter of whether that bounce happens now, or from a lower level.

Developed Markets Abroad Outperform As Accommodative Monetary Policy And The Prospect Of Fiscal Support Drive Capital Inflows. The MSCI Europe Index advanced 3.2% in February, outpacing both the S&P 500 and MSCI EAFE by a sizable margin, and strength out of euro area country indices continued into early March as investors sought relative safety as U.S. tariffs on Canada, China, and Mexico went into effect. Accommodative monetary policies have buoyed economic growth estimates for the EU and U.K. early in the new year, and the European Central Bank (ECB) again cut key policy rates in early February, while leading market participants to believe that additional support was possible, if not likely, in the coming quarters. Hopes for easier monetary policy pulled capital into euro area stocks in January/February, but the most impactful and unexpected shift spurring economic optimism across the pond could come on the fiscal front.

In early March, in a surprising move, Germany voiced a willingness to step up spending on manufacturing and military capabilities, possibly signaling the beginning of the end for a nearly century-long period of fiscal austerity. This could be a watershed moment for euro area economic growth, but skepticism remains warranted as there have been no actions taken yet and when the rubber meets the road some euro area countries could balk at what is proposed, limiting the size and impact of any fiscal support. Sovereign bond yields across the euro area rose on the prospect of more debt needing to be issued, and the euro currency rallied versus the U.S. dollar, touching 1.08€ to $1, a level last seen in November prior to the U.S. presidential election, and a sign of capital being repatriated and moving out of the U.S in favor of Europe.

The German DAX garnered headlines after touching all-time highs on its way to a 21.9% return in the first two months of 2025, overshadowing peripheral European country indices such as Italy, Greece, and Spain which have all rallied 18% or more in U.S. dollar terms year-to-date. Over the trailing three years, Italy, Greece, and Spain have quietly bested the S&P 500 – who had that on their bingo card? From a valuation perspective, developed markets abroad remain relatively attractive, with the MSCI EAFE trading at 15 times estimated next twelve months earnings, which compares favorably to the S&P 500’s loftier valuation of 21.5. Perhaps most notably, even amid signs the U.S. economy is slowing, there is little hope for less restrictive monetary policy in the near-term, but policymakers in Europe appear willing to ease policy to support economic growth despite sticky inflation, and movement on the fiscal front would be the cherry on top for investors in the euro area.