Financial Markets Review

U.S. equity markets struggled through February with major indices broadly lower amid renewed growth concerns and escalating trade policy risks. Of all the major indices, the S&P 500 fared the best, falling 1.42%, while the tech-heavy Nasdaq retreated 3.97% and small caps were particularly weak, with the Russell 2000 down 5.45%. While the S&P 500 oscillates on either side of breakeven for 2025, performance has been broader than the headline suggests. Notably, the equal-weighted S&P 500 outperformed the traditional market-cap weighted index by 84 basis points in February, reflecting relative strength in many other companies outside of the Magnificent 7, while weakness in the Magnificent 7 weighs on the S&P 500.



Source: FactSet

It’s safe to say that volatility is now back, as witnessed by the multiple 2%+ intraday swings in the S&P 500 over the past couple of weeks. Some of this volatility can be chalked up to the uncertainty over trade policy. In early February we saw the proposal of 25% tariffs on Canada and Mexico and 10% on China, though implementation was delayed pending further negotiations. As the White House flip-flopped between enforcement and reconsideration, markets became considerably unsettled. At the time of this writing, tariffs on Mexico and Canada are set to move forward, while an additional 10% tariff on Chinese goods is scheduled for April. Much has been discussed in the financial news media regarding the dual threat these policies pose: weighing on economic growth through dampened trade activity while simultaneously applying upward pressure on prices, complicating the inflation outlook. By the time you read this, the tariff picture could be completely different. But given the unknown of how tariffs might affect the general economy and the uncertainty around how they may be applied, we may have ignited a level of volatility that we haven’t seen in quite some time.

Another source of the recent spate of volatility can be traced to the broader market narrative surrounding a renewed growth scare and the potential emergence of the dreaded “S” word – stagflation. Doubts around the economy began to percolate when February’s consumer confidence report posted its steepest monthly decline since 2021, with particular deterioration in respondents’ outlook on the labor market. At the same time, January retail sales contracted for the first time since August 2024, the housing market exhibited signs of softening and January’s ISM services index missed expectations with new orders declining to their lowest level since mid-2024. And just in the past couple of weeks, the February ISM Manufacturing dropped with new orders back in contraction territory, while the employment component fell and prices accelerated. The weakness in economic reports drove the Citi Economic Surprise Index into negative territory and it has caused the Atlanta Fed’s GDPNow to forecast negative GDP growth in the first quarter of this year. In just a matter of weeks, the estimate of first quarter GDP went from +3.9% to -2.8%, highlighting the fragility of the economic expansion. Lastly, the January Consumer Price Index (CPI) report surprised to the upside, with shelter costs remaining particularly sticky. Similarly, the January Producer Price Index (PPI) showed hotter-than-expected readings, and core PPI from December was revised higher. The softening economic reports, coupled with elevated inflation expectations, have led to conversations about possible stagflation.

When volatility spikes as it has over the past few weeks and markets become unsettled, the price action seemingly comes as a surprise to many. However, none of this should surprise anyone. Coming into the year, there was absolutely no room for error. While the perceived risk might have been low, the actual risk was quite high. Over the past several months, we have written countless pieces on the extreme valuations and historic concentration of the market, specifically the S&P 500. The market was priced for perfection and any blemish was certainly going to be magnified. At the start of the year, expectations for S&P 500 earnings were high with Q1’25 growth at 11.49% and CY’25 growth at 12.57%. However, as the quarter has progressed, corporate earnings guidance has also taken a more cautious turn. While the fourth-quarter earnings season largely met expectations, forward guidance has softened materially. Jefferies noted a surge in negative guidance revisions for both the first quarter and full-year 2025, with nearly half of companies issuing below-consensus outlooks for Q1. According to FactSet data, Q1’25 S&P 500 earnings estimates have now declined by over 3.5% since the start of the year and CY’25 S&P 500 earnings estimates have slipped just over 1%.

In sum, February’s market pullback reflects a confluence of factors, from trade tensions and softening economic data to rising inflation pressures and weakening corporate guidance. There is an awful lot to feel good about in the economy and the financial markets when considering the resilience of the consumer and the relative strength of corporate balance sheets. However, the mounting risks, whether policy-driven, economic, or geopolitical, serve as a reminder to remain grounded. As always, disciplined risk management and a focus on long-term strategy are essential as we navigate the complex and evolving landscape ahead.

Tandem Strategy Update*

As many long-time followers of Tandem know, our strategies are not designed to mirror the market. We are active managers focused on identifying opportunities in individual businesses, independent of broader market movements. Our clients are business owners, not market owners. Short-term volatility in equity indices often creates opportunities to buy or sell companies trading at unsustainable valuations. The S&P 500’s composition, price or valuation level is irrelevant to us; what matters is the underlying business. That’s why we may buy when the market is selling off or at all-time highs, and likewise, we may sell in both scenarios.

Despite recent volatility, the S&P 500 remains near record highs. Volatility doesn’t just mean declines, as markets can move dramatically in both directions. Beneath the surface, weakness has been relatively concentrated in those companies that drove the bulk of the market’s returns over the past couple of years. However, the recent volatility has provided us with several opportunities to both add and trim a few core positions.

Across all our strategies, we have taken the opportunity to trim our position in JM Smucker (SJM) for fundamental reasons, as the share price has bounced back sharply. SJM has been a long-time core position and continues to pass through our quantitative model; however, SJM has fundamentally deteriorated to the point that our process dictates we reduce our risk and position size in the company. Johnson & Johnson (JNJ) has suffered the same fate, so we have also reduced our position within our Large Cap Core and Equity strategies.

Based on our quantitative model signaling an unsustainable valuation, we took the opportunity to reduce our positions in O’Reilly Automotive (ORLY) within our Equity and Mid Cap Core strategies. In addition, we trimmed our position in Intuitive Surgical (ISRG) in our Equity strategy. Both companies continue to meet and perform well on a fundamental basis. However, their share prices ran up to a point where it was prudent to reduce our weighting and risk in the position.

Lastly, we took the opportunity to increase our position in IDEXX Laboratories (IDXX) within our Equity strategy. IDXX is a global leader in pet healthcare innovation through the development, manufacture and distribution of products primarily for the companion animal veterinary, livestock and poultry, dairy and water testing markets around the world. The company recently reported an excellent quarter – beating on both the top and bottom line, while also guiding FY’25 earnings to come in slightly higher than current analysts’ estimates, representing 8%-12% earnings growth this year. Due to their strong fundamental position, IDXX also announced their intention to repurchase $1.5 billion of shares throughout 2025.

*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Source: Source of all data is FactSet, unless otherwise noted.

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Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.​