By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Major indexes declined during the holiday-shortened week, following Presidents’ Day on Monday. The week started on a positive note with stocks generally trending up, leading the S&P 500 to reach record highs on Tuesday and Wednesday. However, sharp losses later in the week erased these gains, resulting in a lower finish for the major indexes. Much of the week’s news centered on geopolitics and tariff developments. President Donald Trump’s efforts to end the Russia-Ukraine conflict and his announcement of potential tariffs on automobiles, pharmaceuticals and lumber products dominated headlines, though details about the tariffs remain limited. A lack of details on planned tariffs continues to frustrate investors, who remain uncertain how to position portfolios when the narrative evolves on a weekly basis.
Defensive sectors such as consumer staples, healthcare and utilities outperformed, while cyclical sectors like communication services, consumer discretionary and industrials faced the largest losses. The S&P 500 fell 1.6% over the shortened week, including a Friday sell-off driven by disappointing consumer sentiment, high long-term inflation expectations and news of a new coronavirus strain in China. Large-cap value stocks led across U.S. Russell style and market-cap indices, with value stocks performing well overall. Outside of the United States, both emerging and developed markets, as measured by the MSCI Emerging Markets and EAFE indices, outperformed the S&P 500. China, in particular, has seen its stock market surge this year in hopes that the worst of its economic woes are behind it. The MSCI China index is up a world-leading 18% year-to-date.
Small- and mid-cap stocks also retreated, giving up much of the ground they gained earlier this year. The Russell 2000 lost 3.7%, while the S&P mid-cap 400 fell 3.0%. The Russell 2000 is now down 1.6% year-to-date, a notable reversal from the 4% gain it notched just a few weeks ago. A significant factor in the negative shift in market sentiment was Walmart’s fourth-quarter earnings report. Although the retailer posted better-than-expected results, its guidance for the year ahead fell short, raising concerns about consumer spending and the overall economy. This followed a weak retail sales report from the Commerce Department, showing the largest monthly decline in retail sales in nearly two years.
The week’s economic data did little to improve investor confidence. On Tuesday, the National Association of Home Builders reported that its housing market index for February fell to 42, its lowest level in five months. The decline was attributed to uncertainty surrounding tariffs, high mortgage rates, and rising prices for both new and existing homes. January housing starts also dropped nearly 10%, further signaling weakness in the housing market. Additionally, S&P Global’s February Composite Purchasing Managers’ Index (PMI) showed near-stalled U.S. business activity, with services activity falling into contraction for the first time in several years. The University of Michigan’s Index of Consumer Sentiment for February dropped nearly 10%, signaling a noticeable shift lower in consumer confidence. Notably, inflation expectations for the year ahead jumped to 4.3%, up from 3.3% in January. Long-term inflation expectations reached their highest level since 1995. These factors pointed to growing concerns about the strength of the American economy, further exacerbated by fears of tariff-driven price hikes.
Treasuries gained after a midweek rally following the release of the U.S. Federal Reserve’s (Fed’s) meeting minutes, which indicated that policymakers were prepared to hold rates steady until inflation improves. The weak PMI data on Friday triggered another rally in Treasuries. Municipal bonds posted slight gains, supported by seasonal reinvestments, while investment-grade corporate bonds posted negative returns amid heavy new issuance. The 10-year Treasury yield fell 6 basis points to 4.42%, and the 2/10-year Treasury yield spread steepened to +23 basis points.
Corporate earnings reports have been mixed as the fourth-quarter reporting period nears its end. S&P Capital IQ consensus estimates now predict a 14.3% year-over-year rise for S&P 500 earnings in the fourth quarter (Q4) 2024, surpassing the previous 8.7% estimate. Nine out of 11 sectors have seen upward revisions for Q4 earnings. Full-year earnings growth projections for 2024 and 2025 are 9.9% and 10.1%, respectively, for the S&P 500. MidCap 400 and SmallCap 600 earnings are expected to rise by 1.5% and 12.2% in 2024, respectively, while small-cap earnings are projected to decline 7.4% in 2024 but rebound with a 15.0% gain in 2025. However, the fourth quarter’s strength may come at the expense of 2025 estimates, which have seen earnings growth expectations fall to 9.7% year-over-year growth compared to 12.7% previously.
Overall, despite some positive earnings revisions and a modest economic outlook, investor sentiment remains cautious. Concerns about tariffs, inflation and weak consumer sentiment continue to weigh on markets. The housing market, in particular, faces headwinds from elevated mortgage rates and high costs, which could dampen economic growth and keep inflation elevated in the coming months. As markets navigate these uncertainties, defensive sectors are likely to remain favored over more cyclical ones, reflecting a broader shift in investor preferences.
Looking to this week, we will get additional detail on several of the topics discussed above. Tuesday will bring updates on housing and consumer confidence. Consumer confidence will be closely watched following corporate commentary indicating that consumer wallets may be getting slimmer. New home sales are expected to decline as prices rise. The U.S. housing market remains a thorn in the side of consumers, politicians and economists at the Fed. Thursday will see a revision to the fourth-quarter reading of GDP. A disappointment relative to expectations would likely have ripple effects through both the bond and stock market. Finally, Friday will bring the Fed’s preferred measure of inflation in the form of the Personal Consumption Expenditures Price Index (PCE). Expectations are for inflation to continue its path lower, but any significant deviation higher would be cause for concern.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, FEB. 24 | ||||
| TUESDAY, FEB. 25 | ||||
| 9:00 am | S&P Case-Shiller Home Price Index | Dec. | — | 4.3% |
| 10:00 am | Consumer Confidence | Feb. | 102.4 | 104.1 |
| WED., FEB. 26 | ||||
| 10:00 am | New Home Sales | Jan. | 647,000 | 698,000 |
| THURSDAY, FEB. 27 | ||||
| 8:30 am | U.S. Gross Domestic Product (2nd revision) | Q4 | 2.3% | 2.3% |
| 8:30 am | Initial Jobless Claims | Feb. 22 | 225,000 | 219,000 |
| 10:00 am | Pending Home Sales | Jan. | -2.0% | -5.5% |
| 8:30 am | Durable Goods Orders | Jan. | 1.9% | -2.2% |
| FRIDAY, FEB. 28 | ||||
| 8:30 am | Personal Income | Jan. | 0.5% | 0.4% |
| 8:30 am | Personal Spending | Jan. | 0.2% | 0.7% |
| 8:30 am | PCE Price Index (y/y) | Dec. | 2.4% | 2.6% |
| 8:30 am | Core PCE (y/y) | Dec. | 2.6% | 2.8% |
| 8:30 am | U.S. Trade Balance in Goods | Jan. | -$122.5B |
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