Recap of Year-to-Date Market Performance
Stocks started 2025 trading higher but have since pulled back.
The S&P 500 has declined more than -8% from its all-time high on February 19th, lowering its year-to-date return to -5% (Figure 1). The Nasdaq 100, an index of technology and growth stocks, is down -7% year-to-date, while the small-cap-focused Russell 2000 has fallen -9%.
The Magnificent 7 group, including Microsoft, Apple, Meta, Alphabet, Amazon, Nvidia, and Tesla, has declined nearly 15%.
What’s Behind the Market Selloff?
Several factors are contributing to the current market selloff.
First, momentum stocks that led the 2024 rally are now experiencing a sharp reversal. Figure 2 shows that 2024’s top performers have become 2025’s underperformers. Technology stocks, the Magnificent 7, and Large Cap Growth powered last year’s gains, fueled by enthusiasm for the artificial intelligence industry. However, the concentrated rally led to stretched valuations and crowded positioning, particularly among the biggest companies. As those stocks lose momentum, it’s triggering a rapid unwind, with a large amount of capital rotating simultaneously.
Second, investor exposure to the stock market was high entering 2025. Households’ allocation to stocks reached a record high, and institutional investors, such as pension funds, endowments, and insurance companies, increased their leverage and equity exposure last year as stocks traded higher. Institutional investors and hedge funds are now deleveraging, adding to the selling pressure.
Third, optimism around the Trump administration’s pro-growth policies has given way to concern, with worries that spending cuts and the uncertainty created by tariffs will slow economic growth.
Market Volatility vs. Economic Reality
It’s important to remember that the stock market isn’t the economy, with some data points signaling a different economic reality.
The Federal Reserve’s Weekly Economic Index (WEI), which tracks real-time activity using data such as unemployment claims, rail traffic, steel production, and tax withholdings, remains positive (Figure 3). Despite recent stock market volatility, the WEI suggests that the broader economy hasn’t been significantly impacted.
In the bond market, high-yield credit spreads, which measure the difference in yield between riskier corporate bonds and U.S. Treasuries, remain near all-time lows (Figure 4). The stability of credit spreads indicates that, so far, the selloff has been confined mainly to the stock market.
These two data points suggest the recent volatility may be a market-specific adjustment rather than a systemic issue or sign of broader financial strain.
Is This Normal, and Can the Market Selloff Continue?
Market volatility can be unsettling, but it’s a normal part of investing. Periods of enthusiasm often lead to recalibration.
It’s natural to feel uncertain, but history shows that staying invested through volatility and maintaining a longer-term view is prudent. Since 1928, the S&P 500 has experienced a decline of -5% or more in 91 of the past 98 years. Yet, markets have demonstrated an ability to recover and reward patience.
We continue to welcome volatility of this nature and view these periods of economic uncertainty as an opportunity to strengthen your portfolio. As in real estate, you earn investment returns when you buy assets, not when you sell them.
