76report

March 10, 2025

What’s Driving Today’s Big Sell-Off

As investors wrestle with policy uncertainty and a potentially slowing economy, mega cap tech stocks are bringing down the market. The S&P 500 Index is down approximately 3.5% in mid-day trading today, while the tech-heavy Nasdaq Composite is down around 5%.

It was only a few weeks ago, on February 19, that the S&P 500 reached an all-time high. Both the S&P 500 and the Nasdaq are now at their lowest levels of 2025, down approximately 5% and 10% respectively on a year to date basis.

The sell-off has not been uniform. Tech stocks are leading the way down.

Since February 19, the S&P 500 Index has declined approximately 9% and the Nasdaq Composite Index is down 14%.

Meanwhile, the S&P 500 Equal Weight Index is only down 4%.

S&P 500, S&P 500 Equal Weight, Nasdaq Composite

(Total Return - Year to Date)

The S&P 500 Equal Weight Index is important to watch because it reflects the average performance of all stocks within the index.

The standard S&P 500 Index on the other hand is market capitalization weighted. This means that its skews towards the most valuable companies in the index.

In practice, this means the performance of the standard S&P 500 Index relies heavily on the mega cap tech stocks that dominate its top holdings.

While the average Magnificent Seven tech stock is down approximately 6% today, the S&P 500 Equal Weight Index is down just over 1%.

Concentration risk

Over the past few years, a handful of stocks with relatively high valuations have come to dominate market indices.

Many, if not all of these, are impressive companies with exceptionally strong positions within their niches—but high valuations made them vulnerable.

In constructing our Model Portfolios, we have deliberately avoided these stocks in an effort to provide subscribers with a broader base of investment opportunities.

In addition to valuation concerns, we avoided these stocks because of the high exposure to mega cap tech that most investors already have through ETFs, index funds and other commonly owned funds.

As we monitor our Model Portfolio holdings today, average performance intraday is down 1% to 2%, versus the 3.5% decline for the S&P 500 and 5% decline for the Nasdaq. Additionally, many of our holdings are actually in positive territory.

What is working… and what is not?

Prevailing market narratives point to recession risk. Defensive stocks and interest rate sensitive stocks are certainly outperforming today.

The financial media, which tends to be ideologically aligned with the broader corporate media, has been and continues to be hypercritical of the Trump economic agenda (if not overtly hostile to it). This is clearly influencing market sentiment.

A key focus of the markets today has been Trump’s interview over the weekend with Maria Bartiromo.

When asked about the possibility of a recession, Trump referred to a “period of transition,” which has been taken as a signal that he does not care what happens to stocks.

I hate to predict things like that. There is a period of transition, because what we're doing is very big, we're bringing wealth back to America, that's a big thing…. There are always periods of ... it takes a little time, it takes a little time, but I think it should be great for us, I mean I think it should be great - Donald Trump (3/9/2025)

In addition to concerns about tariffs, investors are expressing concerns about a decline in federal government spending.

Fiscal discipline is of course positive (if not crucial) from a long-term perspective. But in the short-term, lower government spending could lead to a decline in overall demand, which could pressure growth.

If the market were truly anticipating a recession or growth slowdown, however, one might expect to see intense pressure on sectors that are traditionally seen as economically sensitive, like Industrials, Materials and Energy.

Yet the only two sectors in negative territory on a year to date basis are Technology (-10%) and Consumer Discretionary (-11%).

S&P 500 Sector ETFs

(Total Return - Year to Date)

The Consumer Discretionary sector, it must be pointed out, is a special case. The sector is dominated by Amazon (AMZN) and Tesla (TSLA), which are down 12% and 43% respectively on a year to date basis (as of mid-day Monday 3/10/2025).

TSLA is having a particularly bad day today, down approximately 14%, as investors become acutely concerned about the impact of Elon Musk’s politics on the company’s customer base.

Where do we go from here?

Although we have avoided the largest mega cap tech stocks, we do hold several tech names across our portfolios, as well as other stocks linked to structural trends in tech, like the AI buildout.

Tech stocks have generally been very strong performers since the end of 2022. Valuations had potentially become stretched for many of them, which left them vulnerable to a reversal in market momentum, like we are seeing now.

While market dynamics have put tech stocks under pressure lately, we remain confident in the long-term outlook as AI reshapes the industry and the entire economy.

At the same time, the poor performance of tech so far this year serves as a reminder that investors should always take a diversified approach. It is tempting, but dangerous, to focus exclusively on what may appear to be the most exciting growth opportunities.

Opportunities outside of tech

One of the main priorities of the Trump administration is to deliver broad-based economic growth. Tariffs have the potential to favor many domestic industries by bringing industrial production back into the U.S.

Anticipated reductions in federal spending may increase the risk of slower economic growth—but are also helping bring down long-term interest rates.

Stocks across our Model Portfolios that tend to be more interest rate sensitive are benefiting from the downward movement in long-term rates. Yields on 10-year Treasuries are now just above 4.2%, down from a recent peak of approximately 4.8% in January.

Falling rates are welcome news for shareholders of certain housing-related stocks as well. Crushingly high mortgage rates have been the key obstacle to housing affordability and demand.

Managing through volatility

The stock market will always have periods of volatility. After a period of strong performance driven largely by the tech sector, we are now experiencing a pullback.

The Trump administration has made it clear that it is not going to have its policy agenda dictated by temporary swings in stock market sentiment—but there is no question that Trump’s economic agenda favors long-term growth and technological innovation.

In the face of some unsettling volatility, investors should as always try to maintain a long time horizon.

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