Hi, everyone. I am Liz Ann Sonders, and this is the March Market Snapshot. Thank you, as always, for taking about 10 minutes out of your day to engage with us.
Well, it has been another rough couple of weeks. The impact of tariffs both imposed and threatened, and retaliations combined with uncertainty regarding the DOGE spending cuts, immigration policy concerns have all contributed to pretty meaningful pullback in stocks and a spike in volatility. The significant uncertainty has also contributed to a plunge in how gross domestic product, or GDP, is tracking this quarter. So the latest reading via Atlanta Fed's GDPNow is negative 2.8%. Now, the manifestation of this uncertainty into market behavior is also glaring.
[Table for Indexes pull back with churn under surface for Major indexes and maximum drawdowns is displayed]
Now, the major indexes are not yet in correction territory year-to-date, at least as of when we're recording this. That would be defined as a 10% decline. However, it's getting awfully close for the NASDAQ and the Russell 2000 Index of small-cap stocks.
[Red box highlighting Average member maximum drawdown from YTD high is displayed]
Now, the fuller story is told in the far-right column here, which tracks the average index member maximum drawdown from year-to-date highs. Other than the Dow, readings for the other three major indexes are not only in correction territory, they are in bear market territory, at least for the NASDAQ and the Russell 2000. This highlights the significant churn and rotation and weakness under the surface.
Now, macro concerns have contributed to this heightened uncertainty and a manifestation into market behavior. These, of course, include Trump administration policies, including tariffs and DOGE spending cuts. Now, specific to tariffs, the mention of tariffs on company conference calls during fourth quarter reporting season, which has just wound down, those mentions of tariffs went parabolic, and surpassed any of the levels that we saw during the 2018 trade war.
[Table for Participation generally improving for % of S&P 500 members outperforming S&P 500 Index is displayed]
Now, it's not all bad news, especially for stock-pickers and/or active investment managers. Over the trailing one-year period, only 23% of the constituents in the S&P 500 have outperformed the index itself, but that's jumped to more than 50% when looking at the trailing one-month period.
[High/low chart for Mag7's widening dispersion for Apple, Alphabet, Amazon, Microsoft, Meta, NVIDIA, Tesla and S&P 500 price is displayed]
Garnering more attention than the overall market has been the Magnificent 7 group of stocks, nicknamed the Mag7. It includes Apple, Microsoft, Nvidia, Meta, Alphabet, which as your reminder is Google, Amazon, and Tesla. They have encountered notable challenges in the early months of 2025, clearly marking a departure from their previous market dominance.
And it's several dynamics that have contributed to the shift in performance dominance, not least being valuation and earnings concerns. It's also the case that hedge funds have been actively reducing their holdings in the group, reflecting concerns about the merits of substantial investments in artificial intelligence, or AI, and angst about the associated law of diminishing returns, especially as it relates to capital spending.
[Table for From Mag7 to Meh7? for Magnificent 7 performance for 2024 is displayed]
It's also the case that dispersion has widened out meaningfully among that group of stocks, which was not the case in 2024. As you can see here, all but one of the Magnificent 7 stocks outperformed the S&P 500 Index itself last year, while all had double-digit positive performance.
[Performance for 2025 is displayed]
But there has been a significant drop in year-to-date rankings within the S&P 500. In fact, not one of the stocks is even in the top 80 best performers this year, and only one, which is Meta, is outperforming the S&P Index itself, while Tesla is bringing up the rear in second to last place.
[High/low chart for Some convergence in EPS for Magnificent 7 EPS y/y growth is displayed]
Now, we think the Mag7 struggles this year to some degree is justified, or perhaps explained by the shifting earnings environment. At play over the past year has been a convergence of sort in the growth rates between the Magnificent 7 and the rest of the market, and that would be defined as the S&P 500, excluding the Mag7. Both reported and forward expected earnings growth for the Mag7 has eased considerably.
[High/low chart for S&P 500 ex-Magnificent 7 EPS y/y growth is displayed]
In contrast, the reported and expected earnings growth for the rest of the market is generally accelerating, especially for the four quarters this year. You can see the full-year comparisons to the right of the dotted line here. Notably, earnings growth for the Mag7 in 2025 is expected to be lower than it was in 2024, while the opposite is the case for the rest of the market.
Yes, there is still stronger growth expected for the Mag7 relative to the rest of the market. However, the latest market action is a reminder of my well-worn adage about connecting the dots between economic or earnings data and how stocks behave. And that adage is better or worse often matters more than good or bad.
[Multi color quilt chart for Mind the swinging leadership door for 11 GICS sectors and S&P 500 is displayed]
Now, one of our themes around expectations for 2025 has been that sector leadership shifts could be swift and volatile. Two-plus months in, that has been the case, and over the past month, the theme in leadership has skewed more defensive, but not without some interesting cyclical strength. In terms of year-to-date performance, as you can see on the right, there is a defensive tilt with healthcare and consumer staples, two of the three best performers at the sector level. By the way, Schwab has Marketperform ratings on both of those sectors.
Financials, on which Schwab has an Outperform rating, is in second place, and has shown considerable strength over the past couple of months. Conversely, the consumer discretionary sector on which Schwab has an Underperform rating is in last place. By the way, you can read more about Schwab's sector views within the Learn tab on schwab.com.
[Yellow arrows for Health Care sector are displayed]
Here are some interesting trends. Healthcare, despite being the leader so far this year, the sector hasn't been in first place in any week thus far, and was at the bottom of the leaderboard during two weeks this year.
[Yellow arrows for Info Tech sector are displayed]
On the other hand, the tech sector, obviously a perennial investor favorite, is the second worst performer so far this year, and has spent three weeks at or near the bottom of the rankings, but it was also the best performer in mid-February. You can also see that despite being in positive territory in four weeks of the year so far, the consumer discretionary sector's recent pullbacks have been strong enough to put the sector in last place.
[List of Takeaways is displayed]
Now, here are the key takeaways from today's discussion. The rapid shift in performance so far this year away from some of the market's prior darlings and toward more defensive areas is a reminder to be mindful of diversification and periodic rebalancing. Significantly heightened policy-related uncertainty has contributed to this shift, as have traditional fundamentals like earnings and valuation concerns. Sector swings have been swift, and we expect that to generally persist throughout the year, so be mindful of staying disciplined. And thanks, as always, for tuning in.
[Disclosures and Definitions are displayed]
