Key Observations
- Growth Scare Hits Risk Assets - Weaker economic data, a patient Fed and shifting policy dynamics fueled slowdown fears triggering a broad selloff of U.S. equities, with defensive sectors outperforming.
- Growth Puts Spotlight on Valuations – High-valuation stocks fell more than peers, while value and defensive sectors led. Consumer staples outperformed consumer discretionary by 11%, while Treasuries rallied amid shifting markets sentiment.
- International Extends its Lead – ACWI ex U.S. took another step forward and added to its 2025 lead over the S&P 500, led by EU financial and defense spending along with a cooling of U.S. high valuation stocks.
Market Recap
Shifting policy dynamics, a patient Federal Reserve holding rates steady and weaker economic data have left markets questioning the strength of future growth. These concerns were amplified when the Atlanta Fed’s GDPNow estimate turned negative for the first time since 20221. While the estimate may have been skewed by a rush of inventory builds in January ahead of the new administration and tariffs (remember import spend negatively impacts GDP), it still unsettled investors. Further fueling anxiety, real consumer spending fell by -0.5%, and consumer sentiment posted its sharpest decline since August 2021, dropping from 105.3 to 98.32. Investor sentiment quickly turned negative, triggering a broad selloff in February and thus far in March across many risk assets specifically technology stocks.
A slowdown in U.S. growth raises questions about the lofty valuations currently assigned to equities. Markets reflected this shift, as stocks and sectors “priced for perfection” suffered steeper declines than their lower-valuation peers. Value stocks led growth stocks and defensive sectors outpaced speculative ones—most notably seen in the nearly 11% performance gap between consumer staples (defensive) and consumer discretionary (speculative).
The Magnificent 7 pulled back sharply, with Tesla leading the decline, down nearly 50% from its all-time high shortly after the election. In fixed income, Treasuries rallied, particularly long-duration assets. The 10-year yield, which was approaching 5% not long ago, is now closing in on 4%3.
Meanwhile, international equities extended their 2025 lead, with ACWI ex-U.S. outperforming the S&P 500 by approximately 11% year-to-date4. European financials and services, particularly defensive stocks, contributed to these gains. The shift in U.S. policy toward EU military support and rising defense spending across European nations further bolstered these sectors. Given these developments—and many of the investor conversations we've had to start the year—we turn our focus to a key theme: U.S. versus international markets.
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Trees Don’t Grow to the Sky
The period from 2015 to 2025 was extraordinary for markets, particularly for a select group of companies. Seventy-three firms in the S&P 500 sustained annualized returns exceeding 20%, well above historical norms. Many of these belonged to the technology sector, benefiting from powerful AI tailwinds that have contributed to today’s unprecedented market concentration. Consider NVIDIA, a prime example of how sustained meteoric growth runs into mathematical constraints. In 2015, NVIDIA ranked 374th in the S&P 500 with a mere 0.06% index weight, despite having joined the benchmark more than a dozen years earlier. Over the past decade, an astonishing 74% annualized return has propelled it to a 5.8% weight5, fueled by unprecedented AI-driven demand for its chips.
Outlook
Despite the recent volatility (with the VIX nearly doubling in recent days6), this is not a call to completely shift out of NVIDIA or Technology; however, our best defense during these periods of uncertainty is to remain diversified. Technology remains a critical sector, warranting a significant market share, and NVIDIA’s success is well-earned, reflecting exceptional execution amid surging AI demand. However, when investors treat U.S. outperformance as inevitable, they implicitly assume a continuation of these extreme trends. And, as history has taught us, markets rarely move in a straight line. So, as we set our gaze forward, let us remain mindful that even the tallest trees cannot grow forever.
Sources
1Atlanta Fed GDPNow as of March 3, 2025
2FactSet as of February 28, 2025
3 FactSet as of February 28, 2025
4 FactSet as of March 12, 2025
5 FactSet as of January 31. 2015 and January 31, 2025
6 FactSet as of March 12, 2025
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
The S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI ex USA is an equity index which captures large and mid-cap representation across Developed Markets countries (excluding the United States) and Emerging Markets countries. The index covers approximately 85% of the global equity opportunity set outside the U.S.
CBOE Volatility (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 Index call and put options.
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