February 2025 Market Recap

We are excited to share the latest market insights from the Goldman Sachs Wealth Management Investment Strategy Group (ISG). 

February was a turbulent month for financial markets with US equities reaching the highest level of volatility (as measured by the VIX index) in two months as concerns grow over the economic outlook and uncertainty of the Trump administration’s policies.

Here’s a recap on what happened in the market and economy. 

The markets: volatile as policy uncertainty takes a toll

ISG believes a mix of factors weighed on US equities in February with S&P 500 returns falling negative (-1.3%). New tariff announcements, dramatic geopolitical developments, and the Department of Government Efficiency (DOGE) team’s aggressive tactics to cut government spending have all pushed policy uncertainty to its highest level since late 2020. Additional factors including weakening consumer and business confidence further cloud the economic outlook.

In contrast, non-US developed (MSCI EAFE Index) and emerging market (MSCI EM Index) equities recorded positive returns of 2% and 0.5%, respectively.

US treasury yields were driven lower by risk-adverse sentiment, lowering the 10-year yield down 33 basis points on the month. The US dollar index also depreciated 0.7% in February. 

The economy: still resilient but with heightened risks

The torrent of policy announcements since President Trump’s inauguration has so far had a limited impact on the economy. Economic activity has eased modestly since the beginning of the year but ISG believes it remains on a solid footing.

Nonfarm payrolls rose 151,000 in February, roughly in line with consensus expectations. Unemployment rose 0.1 percentage point to 4.1%, however, ISG believes jobs growth is still solid and sufficient to absorb new entrants in the labor market.

Although the economy remains resilient, a number of looming risks may shift the economic outlook to the downside. The introduction of a 25% tariff on a meaningful portion of goods imported from the US’s largest trading partners – Mexico and Canada – reveals that the Trump administration is willing to inflict more pain on the economy in pursuit of economic rebalancing than what ISG and other analysts had anticipated. The open question is whether these tariffs will remain in place, and if they do, ISG believes they would likely lower GDP growth and increase prices.

Still, ISG expects the US to likely avoid a recession in this scenario. However, the combination of weaker economic activity and higher inflation against the expectations of even higher inflation and policy uncertainty could complicate matters for the Federal Reserve.

Due to the more aggressive tariff policy and recent communications from Fed members who reiterated the Fed is not in a hurry to adjust policy, ISG has changed their forecast from three rate cuts to two this year.

Looking ahead

ISG is watching a broad range of topics including who the next target of US trade policy may be; central bank meetings in the US, UK, Eurozone, and Japan; Europe’s plans to boost defense spending; and China’s annual “Two Sessions” meeting. This meeting of two of China’s major political bodies – the Chinese People’s Political Consultative Conference and the National People’s Congress – provides foreign investors with important insights into Beijing’s priorities and the country’s overall policy direction.