Market Volatility Returns: Navigating Inflation, Tariffs, and Growth Concerns

February brought renewed volatility to the markets, with technology stocks extending their decline from late December. The Magnificent 7 retreated 8.1% for the month, as concerns over inflation and tariffs weighed on investor sentiment amid the new Trump administration’s policy shifts. While fourth-quarter earnings were broadly solid, uneven economic data and lingering uncertainty led investors to seek stability in defensive sectors. Against this backdrop, bonds – particularly longer-dated Treasurys – played a crucial role in providing balance and resilience to portfolios.

Key Market and Economic Drivers

• February’s market turbulence was reflected across major indices: with the S&P 500 declining 1.4%, the Nasdaq retreating 4.0%, and the Dow Jones Industrial Average falling 1.6%. As of March 3rd, the S&P 500 had edged down 0.3% for the year, relinquishing its early gains.
• Meanwhile, bonds provided a measure of stability, with the Aggregate Bond Index rising 2.2% in February. The 10-year Treasury yield, which climbed as high as 4.6% mid-month, ultimately settled at 4.2%.
• Inflation remained in focus, as the Consumer Price Index rose 3.0% year-over-year, surpassing expectations and accelerating from December’s 2.9% pace. Yet, the labor market continued to demonstrate resilience: unemployment remained historically low at 4.0%, wages continued to rise, and productivity growth held steady.
• Consumer spending showed signs of softening, with retail sales declining 0.9%, including a 1.9% drop in nonstore retail sales. The household savings rate inched up to 4.6% but remains below the historical average of 6.2%.
• Elsewhere, Bitcoin experienced notable volatility, declining from over $102,000 at the start of February to approximately $84,000 by month’s end.

The Magnificent 7 Continues to Weigh on Markets

A wave of policy developments and inflation concerns set the tone for February, unsettling both markets and consumer sentiment. While major indices ended the month lower, the S&P 500 also reached fresh all-time highs along the way, a testament to the market’s underlying strength.

Despite short-term volatility, bonds provided a stabilizing force, underscoring the value of portfolio diversification. For long-term investors, these market fluctuations serve as a reminder of the importance of staying anchored to financial goals rather than reacting to near-term swings.

Figure 1: Asset Class Performance Year-to-Date
Total Returns

The most closely watched market moves in February centered around the largest technology stocks. The Magnificent 7 struggled to regain momentum, even as several major technology companies reaffirmed plans for substantial investments in artificial intelligence and Nvidia delivered strong earnings results. Investor concerns persist regarding the long-term growth potential of these AI-driven leaders, particularly as new tariffs raise the risk of supply chain constraints.

While recent market declines have brought valuations to more attractive levels in certain areas, the Information Technology and Communication Services sectors continue to trade at premiums relative to historical norms. Notably, despite February’s volatility, all but two S&P 500 sectors have maintained positive year-to-date returns, with Healthcare, Financials, and Consumer Staples – traditionally more defensive sectors – leading the way.

Amid market fluctuations, bonds have played a stabilizing role. The 10-year Treasury yield ended February at 4.2%, having retreated from a mid-month high of 4.6%. Declining interest rates tend to lift bond prices, as their existing yields become more attractive to investors. This dynamic reinforces the value of fixed income as a counterbalance to equity market volatility.

As shown in Figure 1, both fixed income and international markets have outperformed the S&P 500, highlighting the benefits of diversification. While technology stocks have been dominant in recent years, February served as an important reminder that maintaining a well-balanced portfolio can help investors navigate shifting market conditions with greater confidence.

Investors and Consumers Remain Focused on Inflation

Inflation remained a key driver of market volatility in February, as concerns over rising prices weighed on both investors and consumers. The Consumer Price Index climbed back to 3% – its highest level since last summer – while broader inflation data revealed persistent pricing pressures across multiple categories, exceeding many economists' expectations.

Figure 2: Consumer Concern Regarding Higher Inflation
Inflation Expectations Next 12 Months and 5 Years, University of Michigan

Consumers, in particular, are bracing for continued price increases. Rising costs for essentials such as food and housing, combined with the anticipated impact of new tariffs, have heightened inflation expectations. As indicated in Chart 2: over the next 12 months, consumers foresee inflation climbing to 4.3%, up from 3.3% in January, while long-term expectations have also edged higher, with a projected five-year average of 3.5%.

For investors, inflation’s resilience introduces additional uncertainty, particularly regarding Federal Reserve policy. If price pressures remain stubbornly elevated, the Fed may need to maintain higher interest rates for an extended period, potentially shaping market dynamics in the months ahead.

Keeping Tariffs in Perspective

Global trade developments continue to influence market sentiment as new tariffs take effect. President Trump recently confirmed tariffs on imports from Canada, Mexico, and China, disappointing those who had hoped for extensions or last-minute negotiations. Additional tariffs are expected in the months ahead, including potential retaliatory measures from trading partners imposing duties on U.S. goods.

While tariffs can raise concerns—effectively acting as taxes on imported goods that may be passed along to consumers—they are only one piece of the broader economic landscape. With inflation already a pressing issue, higher tariffs have the potential to add further cost pressures, particularly on essential goods. This risk is amplified if other nations respond with their own trade restrictions, escalating tensions and introducing new uncertainties. As Figure 3 shows, the U.S. runs a significant trade deficit with several major trading partners. 

Figure 3: U.S. Trade Balance by Country
Rolling 12 Months. Visible Trade, Free Alongside Basis

At the same time, it is important to place these developments in historical context. The United States has long used tariffs as a policy tool, dating back to the Industrial Revolution and reaching a peak during the Great Depression. Oftentimes, their purpose is to protect key domestic industries, particularly those related to national security and technological innovation.

The previous round of tariffs during President Trump’s first term ultimately led to revised trade agreements with major partners, including Mexico and China. For this administration, tariffs may once again serve as leverage in broader negotiations, whether on economic or geopolitical matters.

Moreover, history has shown that market reactions to trade disputes can often be more dramatic than the actual economic impact. While trade tensions created bouts of volatility between 2017 and 2019, financial markets continued to perform well overall. While today’s concerns differ in some ways, they serve as a reminder that not all market fears materialize into long-term disruptions.

Corporate Earnings Remain a Bright Spot

Amid ongoing market and economic uncertainties, corporate earnings continue to demonstrate strength. Earnings-per-share growth of 18.2% year-over-year – the highest since 2021, according to FactSet – highlights the resilience of businesses across industries. This earnings season saw broad participation in growth, improving profit margins, and strong financial performance, all of which signal a healthy economic backdrop. Notably, 75% of companies surpassed consensus earnings expectations, in line with historical trends, though the size of these earnings beats surpassed the 10-year average.

Figure 4: The Stock Market Follows Earnings in the Long Run
S&P 500 Index Price and Trailing Earnings-per-share Since 1990

Over time, financial markets are driven by corporate earnings rather than short-term headlines or investor sentiment. Current Wall Street projections suggest that S&P 500 earnings-per-share could reach $266 this year, representing a robust 12% growth rate. While economic conditions may evolve in the months ahead, maintaining a focus on fundamental drivers such as earnings remains far more valuable than reacting to daily headlines and market noise.‍

Staying Invested: A Proven Strategy for Market Volatility

Market pullbacks, while often uncomfortable, are a normal and expected part of investing. In fact, declines of this magnitude have occurred regularly: twice in 2024, three times in 2023, and a dozen times during the 2022 bear market (Figure 5). These fluctuations are an inherent feature of market cycles, yet history shows that investors who remain committed to their long-term strategy tend to be rewarded.

Figure 5: S&P 500 Total Returns and Pullbacks by Calendar Year

While recent market performance may not align with the optimism that began the year, key economic and financial indicators remain encouraging. Corporate earnings have demonstrated resilience, and from a risk perspective, high-yield credit spreads remain well below pre-pandemic levels, suggesting that bond markets are less concerned about growth than equity markets.

Additionally, while technology stocks have faced headwinds, other sectors have performed well in recent months. Diversification across asset classes and global markets has been particularly beneficial, as bonds have gained value amid falling interest rates. As has often been the case, fixed income has played a stabilizing role, helping to offset equity volatility in well-balanced portfolios.

Through decades of market cycles, history has shown that a disciplined, long-term approach remains one of the most effective ways to navigate volatility. While trade policies, inflation, and evolving AI trends will continue to garner headlines, successful investing is not about reacting to any single day, week, or month. Investors who maintain a well-constructed, diversified portfolio – such as the Farther Dynamic Core Models – are better positioned to achieve their financial goals over time.

We invite you to connect with your Farther advisor for any questions related to this month’s market commentary.