Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of February 2025.
GLOBAL
TRENDS
After restrictive monetary policies helped to curtail persistent inflation, most global economies have begun to lower interest rates to help foster growth and support global labor markets. Short-term interest rates from most of the world’s largest central banks are still elevated relative to the last decade, which adds pressure to global financial systems.
Offsetting these easier global financial conditions is a sharp increase in global trade policy uncertainty.
While the war in Ukraine continues, after over 15 months of conflict in the Middle East, a ceasefire was signed on Jan. 19 between Hamas and Israel. Aside from the human tragedy that is always associated with war, these conflicts have also added to risks and volatility for financial markets.
Taken together, recent global and economic actions have kept investors on edge. Despite these concerns, global economic growth remains resilient, driven by consumer spending in most developed nations. We expect this to continue in 2025, although likely at a slower rate than historical norms.
CENTRAL BANK
POLICIES
The Federal Open Market Committee last met on Jan. 29 and held interest rates steady, keeping their target range for the federal funds rate at 4.25%-4.50%. In a prepared statement by the Federal Reserve, it was noted: “Recent indicators suggest that economic activity has continued to expand at a solid pace.
The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.” The committee meets next on March 19, and markets are not expecting any changes to the target interest rate. Looking out over all of 2025, at the end of February, markets are expecting three 25-basis-point interest rate cuts as implied by federal funds futures.
The European Central Bank last met on Jan. 30 and lowered their target interest rate by 25 basis points. In its prepared statement, the ECB noted that future decisions “will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.” As of the end of February, market participants are expecting another 25-basis-point cut from the ECB when they meet next in March.
EQUITY
PERFORMANCE
Domestic equities were down in February, with smaller companies selling off more than their larger counterparts, as noted by the Russell 2500 underperforming the S&P 500. International equities were positive in February and have bested domestic equities for the last two months.
Focusing on the S&P 500, six sectors detailed gains in February, with five sectors posting losses. Consumer staples led the way, returning over 5.5% during the month.
Fourth quarter 2024 earnings season for the S&P 500 is well underway, with 97% of the index having reported by the end of February. Results are very strong, with the current earnings season detailing the sixth quarter in a row of actual earnings growth. Specifically, the S&P 500 is on pace to grow its quarterly earnings by over 13% compared to last year’s quarterly results, with over 70% of companies that have reported posting actual earnings growth. From a sector lens, only industrials and energy have shown declines in actual earnings, with communications, financials and consumer discretionary all growing their actual earnings by over 20%.
Focusing on performance, the S&P 500 fell by 1.3% in February. The blue-chip Dow Jones Industrial Average dropped by 1.4% over the month. The tech-heavy Nasdaq composite posted losses of 3.9%. International stocks posted strong results, with the MSCI Emerging Market Index posting gains of 0.5% in February. The MSCI EAFE Index of developed international equities gained 1.9% over the last month. Finally, the MSCI All Country World Index of developing and developed market stocks dropped by 0.6% during February.
INTEREST RATES
AND GROWTH
On Jan. 30, U.S. GDP for the fourth quarter of 2024 came in at 2.3%, below the 3.1% growth posted in the third quarter of 2024, and was unchanged with the first revision on Feb. 27. Despite the disappointing figure, the report continued to detail a strong and resilient U.S. consumer, with personal consumption accelerating to the highest levels since early 2023.
Offsetting this strength and weighing down the GDP were pullbacks in exports, private investment and government expenditure.
At this past December’s FOMC meeting, the Fed released their latest summary of economic projections, which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested higher expected GDP growth and lower unemployment forecasts for 2025. This good news was somewhat offset by a higher core inflation expectation for 2025, compared to the Fed’s previous economic projections.
During the month of February, the U.S. Treasury yield curve moved in a net-flattening shape, with yields falling and longer maturity yields falling more than shorter maturity yields. Specifically, the 2-year U.S. Treasury yield fell by 21 basis points and ended the month at 3.99%. The 10-year U.S. Treasury yield fell by 33 basis points and ended the month at 4.21%. In addition to lower Treasury yields, credit spreads, or the premium investors require for credit exposures, moved higher for both investment-grade and high-yield credit bonds over the last month.
Mortgage rates moved lower in February, as Freddie Mac’s Primary Mortgage Market Survey showed the 30-year fixed-rate fell to 6.76% on Feb. 27, down 19 basis points from Jan. 30.
POLITICAL AND
REGULATORY TRENDS
On Jan. 20, President Donald Trump’s second term as president began. In the first weeks of his presidency, he signed several executive actions, including using the International Economic Emergency Powers Act to impose tariffs on Canada and Mexico on Feb. 1. These proposed tariffs were delayed by a month and are set to take effect on March 4. Trump has also levied additional tariffs on imports from China.
INVESTMENT
TRENDS
Another strong earnings season for U.S. equities was offset by trade uncertainty, resulting in negative returns for domestic equity investors over the last month. Headline inflation has moved lower over the last year, but progress appears to have stalled with January’s consumer price index moving up to 3.0%.
Core prices, or CPI excluding food and energy, also continue to be above the U.S. central bank’s 2.0% target, with the most recent reading detailing core prices rising at 3.3% over the last year. The U.S. GDP report for the fourth quarter of 2024 detailed a resilient and strong consumer despite coming in below expectations at 2.3%. Finally, the most recent economic projections from Fed officials detailed an expected 2025 year-end GDP of 2.1%, with inflation measures above the U.S. central bank’s target of 2.0%.
Stresses on the global financial system, global trade uncertainty, cooling-but-persistent inflation domestically and abroad, and geopolitical tensions continue to weigh on investor sentiment. On balance, the headwinds and tailwinds currently at play suggest there is a potential path for global economic growth, albeit at a slower pace than initially expected.
Equal Housing Lender.