Weekly market wrap

Markets remain volatile – but diversification has worked

Key Takeaways: 

• Markets remained volatile this past week, with the S&P 500 dipping into correction territory on Thursday, down about 10.1% since its Feb 19 high. The technology-heavy Nasdaq was down about 14% at its lows last week.
• Despite the sharp pullback in U.S. stock markets, there have been areas of financial markets that have performed better – and are even up for the year:
  • Within U.S. equities, value and cyclical sectors have outperformed tech and AI stocks.
  • Bonds have outperformed stocks broadly this year thus far as investors looked for safety.
  • And many international stock markets, including Europe and China, have been up 8%-10%.
• Market performance this year underscores the value of diversification in investments. Those investors with diversified or balanced portfolios have seen relatively better returns this year so far.

Markets continue to remain volatile, as uncertainty is an overhang

The stock market remained volatile over the last week, with the S&P 500 briefly dipping into correction territory, down 10.1% from its recent highs. The technology-heavy Nasdaq has dropped about 14% from peak-to-trough this year. This was the first 10%+ drawdown in the S&P 500 since October 2023, nearly 1.5 years ago.

This pullback comes as markets grapple with a few concerns:

• U.S. economic growth seems to be shifting to a slower gear. Data thus far in the first quarter points to softer consumption, with consumer sentiment surveys also indicating some weariness in confidence overall.
   
• The economy also seems to be softening at a time when tariffs and government policy uncertainty remain elevated. Tariff uncertainty has become an overhang, not only on consumers, but on corporations that may be delaying spending or capital-markets activity until there is more clarity.

• The U.S. stock market was somewhat extended from a valuation perspective coming into the year, especially among the mega-cap technology stocks. Investors have been rotating away from these higher valuation parts of the market, which has added downward pressure to stock-market returns.

However, keep in mind that pullbacks are normal, and historically in any given year we see one to three corrections in the 5% to 15% range. We don’t yet see the scope for a deep or prolonged bear market, especially as we do not expect an imminent recession in the economy. For long-term investors, we believe the corrections in the market can be used as opportunities.

Corrections are the norm in any given year:

Within U.S. stocks, value has outperformed growth

Despite the recent market volatility and ongoing headline noise, there have been parts of the market that have held up well this year and even had positive performance.

Within the U.S. stock market, for example, five of the 11 sectors of the S&P 500 are positive this year. And we have seen defensive and cyclical sectors outperform technology and growth sectors thus far. We continue to favor health care and financials as two sectors that could continue to perform well in the year ahead, particularly if the administration focuses on deregulation and tax policy in the coming months.

Across asset classes, bonds have outperformed equities

This year, we have also seen bond markets outperform equity markets and deliver positive returns, as investors have flocked to safe havens as uncertainty and volatility remains elevated. Treasury bond yields have moved sharply lower from their highs earlier this year, as concerns around economic growth have increased and markets have begun pricing in more Federal Reserve rate cuts. The drop in yields have supported higher bond prices.

In our view, bonds play an important role in balanced portfolios, both as a source of income and as a diversifier to stock markets. Within investment-grade bonds, we continue to see value in extending duration, especially if 10-year Treasury yields move back toward 4.5%, as Fed rate cuts may occur later this year as well.

International equity markets have outperformed domestic stocks

Finally, international markets have outperformed U.S. stocks this year. In particular, the stock markets of Europe and China (primarily Chinese technology stocks) are all positive year-to-date, with the EuroStoxx index up over 10%. This outperformance has come as investors rotated out of higher-valuation U.S. stocks into areas of the global market that offer better valuations and exposure to both growth and value. In addition, Europe, and the German stock market in particular, has done well, as central banks have lowered rates and governments have had a renewed commitment to fiscal stimulus to support economic growth.

In our view, over the long term international and EM equities may not consistently outperform the U.S. stock market, especially if the U.S. can continue to deliver outsized productivity and earnings growth. However, we continue to see international stock markets having a role in diversified portfolios, especially this year when the U.S. growth outlook has softened.

Diversification is a key theme this year

Overall, after two years of strong performance in the stock market, driven primarily by mega-cap technology and AI sectors, we have seen in 2025 thus far that diversification has been an important theme for portfolios.

The broader stock market has been volatile with negative returns, and the uncertainty of tariffs and government policy remains an overhang. Nonetheless, there have been pockets of the financial markets that have held up well and had positive returns. These include areas like U.S. defensive and cyclical sectors, bond markets, and international stock markets.

To us, this underscores the value of portfolio diversification. In fact, if you look at the returns of a simple 60-40 portfolio versus the S&P 500, you can see that balanced portfolios have offered downside protection this year. For long-term investors, market volatility and stock-market pullbacks are not pleasant, but they can offer opportunities – to rebalance or add quality investments across a diverse set of stocks, bonds and international markets.

Mona Mahajan
Investment Strategy

Weekly market stats

^{Source: FactSet, 3/14/2025. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct 3/16/2025.}

The week ahead

Important economic releases this week include the FOMC meeting and retail sales data.

Review last week's weekly market update.