U.S. equities remained under pressure last week to close out a challenging February as uncertainty around tariffs and other material policy shifts have weighed on market sentiment alongside sticky inflation data and mixed readings on economic growth. President Trump confirmed that previously delayed 25% tariffs on imports from Canada and Mexico would indeed go into effect in March, along with an additional 10% tariff on imports from China.

Declining risk sentiment has sparked a market rotation out of high growth momentum stocks with extended valuations into more value-oriented stocks with higher dividend yields. As a result, the S&P 500 and Nasdaq Composite tumbled by -1.0% and -3.5% last week due to their higher concentration on mega-cap tech stocks, while the Dow Jones Industrial Average managed to post a 1.0% gain with higher exposure to financial, health care, and industrial sectors that fared better last week. While the market rotation has weighed on domestic stocks, international equities are holding up well so far this year in the face of tariff uncertainties and geopolitical tensions as the MSCI All Country World ex-U.S. index has gained 5.5% through the first two months compared to 1.4% for the S&P 500 and -2.3% for the Nasdaq Composite.

Meanwhile, the change in tone among investors over the last few weeks has taken some air out of stocks levered to artificial intelligence optimism, including Nvidia who reported its widely anticipated fourth quarter earnings results on Wednesday. Despite strong results and a bright outlook for demand for its next generation chip series called Blackwell, the stock fell more than 8% in the wake of the report as it wasn’t enough against elevated expectations. The risk of further chip trade restrictions and tariffs on China were a point of worry, even with large increases in AI data center investment expectations from U.S. tech giants.

The continued tariff headlines have also produced wild swings in economic readings in recent weeks as consumers and businesses have tried to aggressively stockpile imports ahead of the impending toll increases. For example, the front-loading of imports, which have grown 21% since November compared to 1% growth for exports, has sent the U.S. trade deficit to its widest point in history. In turn, the sharp swing in the trade deficit alongside depressed business and consumer sentiment has weighed on first quarter GDP expectations with the Federal Reserve Bank of Atlanta’s GDPNow forecast falling from +2.3% increase to a -1.5% decline in Q1 GDP when it was updated on Friday. Other more important components of economic growth like consumer spending and nonresidential fixed investment remain positive, albeit moderating, despite the volatile trade deficit.

In the bond market, the growth uncertainty pushed down Treasury yields. The yield on the 10-year Treasury note ended February at 4.24%, marking its lowest level since early December. The 2-year note ended at 3.99%, the lowest since mid-October. Growth fears have recently overshadowed sticky inflation readings as last week’s core PCE inflation came in-line with expectations at 2.6% year-over-year in January, down from 2.9% in December, though coming tariffs may push inflation readings higher in the short-term.

Looking ahead, geopolitical developments remain front in center including the conflict in Ukraine. The situation remains fluid, and markets will be attentive to any developments that could have an impact on economic stability. Additionally, Friday’s job report for February is also in the spotlight this week as investors gauge layoffs from the federal government workforce and private employer hiring sentiment.

The past week has underscored the markets' sensitivity to a confluence of economic indicators, corporate earnings, and geopolitical events. Staying informed but disciplined to a long-term financial plan and maintaining a diversified portfolio remain prudent strategies amid this dynamic environment. To that point, if you haven’t had a chance, we welcome you to review our thoughts and insights for the coming year in the 2025 Long View.

2025 The Long View | First Merchants Bank