RECAPPING LAST WEEK

Heightened uncertainty around U.S. government policy, a sharp selloff in technology stocks, and concerns of a slowdown in consumption left equity indices lower for the week. The Nasdaq Composite index tumbled 6% after Nvidia’s solid quarterly earnings report failed to quell fears surrounding return-on-investment in the artificial intelligence space, but a Friday rally clawed back nearly half of those losses. The S&P500 and Russell 2000 fell 1% and 1.5%, respectively. S&P500 sector performance was mixed, but technology’s dive captured the spotlight—the semiconductor sub-index sank 7%. Bitcoin plunged 11%, still reeling from the recent theft of $1.5B by North Korean hackers from the Bybit exchange. Crude oil fell slightly, unable to hold a spike from Thursday’s announcement that the U.S. would cancel Chevron’s license to operate in Venezuela. Gold traders took profits, sending the yellow metal lower by 3%, its first weekly loss in nine.

Tariffs continued to dominate the headlines last week with the White House stating that the planned levies on Canada and Mexico would take effect March 4. U.S. Treasury yields continued their slide as bond traders repriced the potential repercussions of trade wars. The 10-year yield fell to 4.23% after peaking above 4.8% earlier this year. U.S. consumer confidence slipped to 98.3 in February, down 7 points and the largest monthly drop in nearly four years. Although the Federal Reserve’s preferred inflation measure moderated last month, the consumer spending reading in the PCE index fell 0.5%, raising concerns about the U.S. economy’s resilience. Unemployment claims jumped to 242K for the week ending February 22, while continuing claims hovered near three-year highs as new jobs were harder to find.

The weekly AAII Sentiment poll reflected an overly pessimistic tone from individual investors, as more than 60% turned bearish on stocks for the next six months. Levels like that are typically seen during deep drawdowns; however, the S&P500 is only 3% below its all-time high from February 19. In U.S. housing news, cold weather was at least partially to blame for the steep drop in new and pending home sales in January, but high mortgage rates and home prices continued to plague the industry—the median house price rose 3.7% YoY to $446,300.

Home Depot’s fourth quarter earnings beat analysts’ lowered expectations, but the home improvement chain issued a cautious outlook. Overseas, Germany’s sentiment and economic indicators showed mild improvement in January. Last week’s election results fueled hopes of a coalition that could tackle the country’s economic woes, but Europe’s changing relationship with the U.S. and the impacts of the Ukraine-Russia conflict clouded the outlook. In Japan, inflation readings continued to trend above the central bank’s 2% target, supporting the case for more monetary policy tightening. Finally, Canada’s Q4 GDP surprisingly beat forecasts at +2.6%, lifted by strong consumer spending, business investment, and exports.

THE WEEK AHEAD

The global macroeconomic narrative has shifted quickly. Concerns about an inflation resurgence have been overshadowed by the outlook for U.S. economic growth. The back and forth with tariffs and federal government cutbacks have added uncertainty that could cause businesses and consumers to be more cautious in their spending. Thus far, only soft data such as sentiment surveys—along with the sharp drop in U.S. Treasury yields—are showing evidence of a potential slowdown in economic growth.

Current estimates for Q1 GDP are around +2.3%, the same as Q4 2024 where consumer spending was a significant boost at +4.2%, suggesting that many businesses and consumers pulled forward spending ahead of expected tariffs. Some hard data starts to arrive this week with February’s U.S. employment picture, which may start to shed light on whether the expected reduction in government jobs can be absorbed by the private sector. ISM manufacturing and services PMI are also slated for release.

Investors will be watching to see if those reports confirm the weakness in business activity revealed by the S&P Global flash PMI readings from two weeks ago. The rest of the domestic calendar includes factory orders and consumer credit, while Broadcom, Target, and Costco will report earnings. Overseas, the European Central Bank is expected to cut interest rates by another quarter point on Thursday. Interest rate markets are pricing in another 75 basis points of cuts this year, but the ECB may choose to communicate caution on further reductions given the uncertain effects of tariffs. Europe’s February inflation figures will be released this week as well. Finally, China’s Caixin PMI and trade balance data are on the docket, followed by CPI and PPI this weekend.

(Schwab)