In Short

• February saw weaker U.S. equities, with the S&P 500 down 1.3%, affected by inflation fears, tariff uncertainty and dampened consumer sentiment. Defensive sectors like Health Care and Consumer Staples outperformed, while Technology stocks struggled.
• International equities have outpaced U.S. stocks so far, with the ACWI ex-U.S. index up 4.6% YTD, benefiting from a weaker U.S. dollar and a rotation into cyclical sectors.
• Despite short-term volatility, we remain constructive on U.S. growth and a broadening equity market, while encouraging diversification and portfolio repositioning amid recent declines.

The Month in Markets

February was gloomier and more uncertain for domestic equities as President Trump moved fast on implementing his America First agenda and U.S. consumers exhibited some concerns surrounding the state of the economy. Despite strong job growth in January, a hotter monthly inflation read alongside generally higher inflation expectations led to some growth fears (or at least growth shivers) as shown by weaker sentiment and retail sales. Tariff news continued to be volatile and only heightened these concerns; while previously announced 25% tariffs on Canada and Mexico were delayed, they are now in effect (along with 20% tariffs on China), with some potential reciprocal levies expected to come in early April. The affected countries have begun to retaliate, with China announcing tariffs on U.S. agricultural goods, Canada imposing 25% tariffs on nearly $100 billion of U.S. imports, and an announcement out of Mexico expected to follow soon. President Trump also announced a potential 25% broad tariff on imports for the European Union, most notably on automotives. In part due to tariff uncertainty and otherwise weaker sentiment, the S&P 500 ended 1.3% lower for the month, after hitting a fresh all-time high on February 19.

Despite a negative S&P 500 return, some more defensive sectors were positive during the month, such as Consumer Staples (+5.7%), Real Estate (+4.2%) and Energy (+4.0%). This trend has resulted in a continued year-to-date outperformance of the S&P 500 equal-weighted index (+2.9%) compared to the market-cap weighted index (+1.4%) through the end of February. Technology stocks have struggled so far this year, as represented by the Magnificent 7 stocks,¹ which helped drive outsized U.S. equity performance over the past two years. These names are down 5.9% as a basket of stocks² year-to date through February, and down 11.3% since mid-December highs.

S&P 500 Sectors: Leaders Become Laggards and Laggards Become Leaders

 

Source: Bloomberg as of February 28, 2025

Yields fell as investors flocked to safety, with the U.S. 10-year Treasury yield moving from 4.63% (having peaked at 4.79% in January) to a low of 4.25% toward the end of the month, and since then moving lower to around 4.15%. Other safe havens, such as gold, have seen a year-to-date rally, reflecting market uncertainty.

Shifting Sentiment

Despite some of the recent weaker economic releases mentioned above, there is likely some level of seasonality and general uncertainty at play in the market reaction, and as such, investors should monitor ongoing data to have a fuller picture of the health of the U.S. economy. We believe some of the uncertainty and angst for investors is captured in the bull-bear spread, which measures the gap between bullish and bearish investor sentiment. The spread hit -41.2 in late February—the most bearish level since September 2022, just before the S&P 500 began recovering from a roughly 20% pullback. While we don't consider this an effective long-term performance indicator, steady economic and company fundamentals suggest it could be a positive signal for markets, as it tends to act as a short-term contrarian indicator.

Another notable market shift on the back of sentiment changes has been the strong start to the year for international stocks, which have lagged in performance compared to U.S. stocks over the past few years. The All-Country World (ACWI) ex-U.S. index is up 4.6% year-to-date—its best start compared to the S&P 500 in 25 years. February also marked the largest monthly outperformance of the ACWI ex-U.S. versus the S&P 500 since December 2022. The reason for the rotation could be multifaceted, perhaps most notably a pullback in technology stocks due to tariff concerns and global competition (specifically DeepSeek). Whereas U.S. stocks skew toward growthier, mega-cap technology companies, non-U.S. stocks tend to lean more towards value, cyclically oriented industries.

There were also big headlines out of Germany, with a plan to unlock hundreds of billions of euros for defense and infrastructure investments, while amending its constitution to exempt defense spending from fiscal limits, signaling a major shift in its economic policies. This move, driven by concerns over European security and reduced U.S. military support, aims to strengthen Germany's defense capabilities, boost its economy, and encourage greater military spending across the European Union.

We often discuss the importance of diversification across sector, style, region and sub-asset class. As such, we believe that the choice between international and U.S. stocks isn't an “either/or” decision, but rather “both/and.” Though domestic equities have made a historic run compared to the rest of the world, there have been periods when exposure to international or emerging market equities has protected against the downside and has contributed to a better risk/reward profile in a multi-asset class portfolio.

Despite the more recent shift in sentiment, our view remains that the U.S. economy can deliver above-trend growth, buoyed by an improving environment for business investment and a deregulatory impulse. Despite the potential for a longer pause from the Federal Reserve, we do not believe that this disrupts our view that equity markets are likely to broaden, and that fiscal policy will be the focus for bond investors this year. As such, we remain constructive and committed to our current broad allocations of “at target” in equities and overweight in investment grade fixed income, encouraging clients to take advantage of the recent decline in equities to reposition portfolios accordingly, particularly as it relates to positions that have appreciated meaningfully over the prior two years.

Portfolio Implications

Equities reversed a longer-term trend during the month, with international stocks moving higher and domestic stocks moving lower, especially small- and mid-cap stocks. While lower-quality small-cap stocks have rallied over the past year or so, we remain constructive on the quality factor over the long-term. We maintain an “at-target” view across equities with an overweight to small and mid-caps as we anticipate the broadening to continue. Admittedly, short-term volatility related to tariffs may create pressure on certain sectors and individual stocks that are more heavily exposed to supply chain disruption. However, any larger pullbacks (10% or more) could be an appropriate trigger to add to risk, especially if one is holding excess cash. In this more challenging environment, we favor employing active management to select companies with high earnings visibility.

Fixed Income moved higher as yields fell, led by the longer end of the curve. We are more constructive on investment grade fixed income as yields are close to fair value, with shorter-dated bonds in particular presenting little downside risk, in our opinion. With the spread of bond yields over cash rates likely to widen further, we see opportunities to deploy cash tactically, adding and/or shortening duration based on movement in rates. Multi-sector bond funds may be an appropriate vehicle to consider, given the levers a manager can opportunistically pull across sector, duration profile, region, etc. Overall, our soft-landing outlook and debt sustainability concerns make us cautious on longer-dated bonds, even if policy rates are cut in the latter half of the year.

With the liquidity drought fading and an expected pickup in M&A and other deal activity due to a healthy macro backdrop, we believe significant opportunities still exist within Private Markets, as investors should expect new buyout activity and an unlocking of distributions. That said, liquidity and capital solutions providers will remain important to work through the substantial backlog of legacy investments. As a result, we continue to see compelling opportunities across secondaries, mid-life co-investments and capital solutions. We are cautious on core private real estate, but this is offset by what we see as abundant market-dislocation opportunities in the value-add and opportunistic sectors and particularly in real estate secondaries. Neuberger Berman’s deep relationships and unique position within the private equity ecosystem have translated into record levels of deal flow across our platform.

Index Returns as of February 2025

Source: Bloomberg, total returns as of February 28, 2025. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.