by Liz Ann Sonders, Chief Investment Strategist, & Kevin Gordon, Charles Schwab & Company Ltd.
Heightened economic uncertaintyâpropelled mainly by trade policyâhas unearthed weakness in the equity market, with most pain felt under the market's surface.
Shown below, the Magnificent Seven (Mag7)âApple, Microsoft, Nvidia, Meta, Alphabet (Google), Amazon, and Teslaâhave encountered notable challenges in the early months of 2025, marking a departure from their previous market dominance.
Meh7?
Source: Charles Schwab, Bloomberg, as of 2/28/2025.
Data indexed to 100 (base value=1/1/2025). An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100. The index number is then expressed as 100 times the ratio to the base value. All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Several dynamics have contributed to this shift in performance dominance, not least being valuation and earnings concerns (more on that below). Hedge funds have been actively reducing their holdings in the group, reflecting concerns about the merits of substantial investments in artificial intelligence (AI) and angst about the associated "law" of diminishing returns. As a result, there has been a shift in investors' attention toward more defensive sectors like Health Care, while Financials' strength over the past few months has been undisturbed. We have market perform ratings on Health Care and Consumer Staples, and an outperform rating on Financials (more on sectors below).
Tariffs taxing confidence
Macro concerns have also led to shifting market leadership trends, including an epic level of uncertainty with regard to Trump Administration policies, including tariffs and DOGE spending cuts. Specific to the former, (fourth-quarter earnings season wound down with Nvidia's earnings release last week) mentions of tariffs on company conference calls has gone parabolicâsurpassing levels during the 2018 trade war.
The economic backdrop has deteriorated as well, with GDPNow from the Atlanta Federal Reserve having plunged into negative territory for the first quarter, as shown below. GDPNow is not an official forecast by the Atlanta Fed; rather, as a nowcast, it's a running estimate of real gross domestic product (GDP) growth based on available economic data for the current measured quarter.
Look out below, GDP
Source: Federal Reserve Bank of Atlanta, as of 3/3/2025.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
Reflecting this heightened uncertainty, U.S. stocks have pulled back, though not yet in correction territoryâŠat least not at the index level. At the index level, drawdowns are in the mid-to-high single-digit territory, as shown below. Notable though is what's shown in the far-right column: At the average member level, drawdowns are well into correction territory other than for the Dow.
Source: Charles Schwab, Bloomberg, as of 2/28/2025.
Some members excluded from year-to-date return columns given additions to indices were after January 2025. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
In terms of the Mag7, dispersion has widened out meaningfully alongside a significant drop in year-to-date performance rankings relative to last year. As shown below, not one of the stocks is even in the top-50 best performers this year, and only one (Meta) is outperforming the S&P 500 index itself, while Tesla is bringing up the rear in last place.
Source: Charles Schwab, Bloomberg, as of 2/28/2025.
All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
It's not all bad news, especially for stock pickers. Over the trailing one-year period, only 22% of the constituents in the S&P 500 are outperforming the index itself. That has jumped to 50% when looking at the trailing one-month period (although that's down from 55% as of last Thursday's close).
Source: Charles Schwab, Bloomberg, as of 2/28/2025.
Trading days used in calculations. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
We think the Mag7's struggle year-to-date is justified, or perhaps explained, by the shifting earnings environment. At play over the past year has been a convergence in growth rates between the Mag7 and the "rest of the market" (the S&P 500 excluding the Mag7). As shown in the chart below, as both reported and forward earnings growth for the Mag7 has eased, the opposite has been the case for the rest of the S&P 500.
Earnings dynamics shifting
Source: Charles Schwab, LSEG I/B/E/S, as of 2/27/2025.
"Magnificent 7" (Mag7) represents Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Past performance does not guarantee future results.
Admittedly, it has been a choppy process, given first-quarter 2025 growth for the rest of the market is expected to decelerate from the exceptional growth in the fourth quarter of 2024. Still, we think the last group of bars in the far-right portion of the chart is the most important aspect to consider. Earnings growth for the Mag7 in 2025 is expected to come in lower than in 2024; the opposite is the case for the S&P 500 ex-Mag7.
This isn't to say that fundamentals have completely changed and turned sour for the Mag7. In fact, the fourth quarter was the eighth in a row in which six or more of the Mag7 members beat earnings estimates. Consistent, strong performance at the top and bottom lines combined with the fact that the rest of the market has pulled ahead in performance terms, is in keeping with the fact that a broadening in performance is not necessarily a zero-sum game.
Swift and strong sector leadership shifts
One of our themes around expectations for 2025 has been that sector leadership shifts will be swift and volatile. Two months in, that has been the case; and over the last month, the theme in leadership has skewed more defensive, but not without some interesting cyclical strength. There are several nuggets to pull from the weekly sector quilt chart below, but we think the following are worth noting:
- In terms of year-to-date performance, there is a defensive tilt with Health Care and Consumer Staples the first- and third-best-performing sectors, respectively.
- Financials is in second place and has shown considerable strength over the past several monthsâunderscoring that the market isn't completely biased away from cyclicals.
- Despite being the leader year-to-date, Health Care hasn't been in first place in any week thus far. Conversely, despite being in positive territory in four weeks of the year so far, Consumer Discretionary's recent pullbacks have been strong enough to put the sector in last place.
- Energy is the most "winning" sector this year with three weeks in the top spot, yet it's the sixth-best performer year-to-date.
Leadership tilting defensive
Source: Charles Schwab, Bloomberg, 12/31/2024-2/28/2025.
Sector performance is represented by price returns of the following 11 Global Industry Classification Standard (GICSÂź) sector indices: Consumer Discretionary Sector, Consumer Staples Sector, Energy Sector, Financials Sector, Health Care Sector, Industrials Sector, Information Technology Sector, Materials Sector, Real Estate Sector, Communication Services Sector, and Utilities Sector. Returns of the broad market are represented by the S&P 500. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
In sum
The rapid shift in performance so far this yearâaway from some of the market's prior darlings and toward more defensive areasâis a reminder to be mindful of diversification and periodic rebalancing. Significantly heightened policy-related uncertainty has contributed to this shift, as have traditional fundamentals like earnings and valuation concerns. Sector swings have been swift, and we expect that to persist throughout the year.
Copyright © Charles Schwab & Company Ltd.
