SUMMARY

To date, 2025 has marked a notable divergence from the trends observed in 2024. The technology stocks, previously celebrated as the “Magnificent 7,” have encountered significant challenges in the early part of the year. Given their substantial weight within the S&P 500, their underperformance has exerted downward pressure on the broader index. Despite this decline, defensive sectors such as healthcare and consumer staples have recorded positive returns year-to-date. This resilience in select market segments is atypical of widespread, recession-driven selloffs. Our models corroborate this assessment, and accordingly, we maintain a neutral stance on equities.

BROAD MARKET PERFORMANCE (AS OF 03/14/2025)

	YTD Performance	Trailing 1-Year Performance
SPY (SPDR S&P 500 ETF)	-3.97%	10.69%
DIA (SPDR DJIA ETF)	-2.20%	8.26%
QQQ (Nasdaq 100 ETF)	-6.18%	9.88%
TLT (20+ Year US Treasury ETF)	3.94%	1.01%
AGG (US Agg Bond ETF)	2.76%	5.83%
Table 1: Source: Morningstar

TARIFF SPARKED SELL-OFF

While many television commentators attribute the current market correction to trade wars and tariff-related uncertainties, our analysis suggests that the recent weakness stems primarily from a sector rotation. Investors appear to be shifting capital away from high-performing technology stocks toward segments of the market that presently offer a more favorable risk-to-reward profile.

Bank of America recently published a compelling chart detailing tariff rates and other trade-related barriers across G20 nations, providing valuable context to the ongoing discourse.

**Figure 1: G20 Trade Barriers by Country**

As we have consistently noted throughout the latter half of 2024, the so-called “Magnificent 7” stocks were the primary drivers of S&P 500 performance last year, while the remaining 493 constituents experienced a below-average year. This disparity resulted in one of the most top-heavy years on record for the S&P 500, with approximately two-thirds of its components underperforming the broader index. Consequently, market valuations reached historically elevated levels, amplifying the risk of a pullback. Our proprietary models detected these vulnerabilities, prompting adjustments in our Smart Sector strategy. We reduced allocations to highly concentrated, “risk-on” sectors such as Technology (e.g., MSFT, AAPL, NVDA), Consumer Discretionary (e.g., AMZN, TSLA), and Communication Services (e.g., GOOGL, GOOG, META, NFLX), while increasing exposure to defensive sectors, including Utilities, Consumer Staples, and Healthcare. Similarly, our Smart Value strategy, focused on individual equities, trimmed positions in technology and consumer discretionary names, boosting our cash and equivalents allocation to approximately 11%.

These tactical shifts have proven judicious. The NASDAQ 100, a technology-heavy index, has experienced a drawdown of approximately 13.75%, whereas the S&P 500 Equal Weighted Index, which mitigates the influence of mega-cap stocks, saw a more modest decline of about 7.85%. While negative returns are never ideal, it is worth emphasizing that a 10% pullback is within the realm of typical market behavior. Such corrections are commonplace even in years that ultimately deliver robust positive returns for equity markets.

**Figure 2: Equity Annual Returns Versus Drawdowns**

MACROECONOMIC VIEW

Similar to the rotation currently unfolding in equity markets—where capital is shifting from growth to value stocks—the global economy appears to be undergoing a parallel transition. A recent report from Bank of America’s Global Investment Strategy team highlighted that 85% of U.S. job market growth in 2024 was concentrated in predominantly public sectors, such as government, healthcare, and education. This dynamic contributed to government spending accounting for one-third of last year’s GDP, underpinned by budget deficits ranging from 6-7%. These figures represent record highs outside of wartime or crisis periods.

Jared Woodard, Head of Bank of America’s Investment Committee, observed, “The global transition from expansive government intervention to a free-market framework may encounter challenges, yet it appears increasingly inevitable given the scale of deficits and mounting debt burdens. Economic growth has been propped up by unsustainable government support and protectionist measures. A recalibration—marked by accelerated private-sector job creation, the resettlement of government workers, broader corporate profitability, and a rebalancing of global trade—will likely require time. Nevertheless, we believe the potential productivity gains from a market-driven economic reset outweigh the associated risks, while the dangers of perpetuating debt-financed, sluggish, and narrowly distributed growth are substantial.”

Although this economic shift may introduce volatility in equity markets, historical data suggests that, absent from a recession, such fluctuations tend to be moderate. Ned Davis Research’s U.S. Recession Probability Model currently indicates that recession risks remain low.

**Figure 3: US Recession Probability Model**

VALUATIONS

The recent market pullback has led to a contraction in the collective forward price-to-earnings (P/E) ratio of the Magnificent 7 stocks, declining from 30x to 26x. Meanwhile, the forward P/E for the remaining 493 constituents of the S&P 500 has remained stable at approximately 20x earnings estimates. Although these valuation levels are not excessively high, they continue to exceed long-term historical averages.

Analysts have been progressively lowering forward earnings estimates for the Magnificent 7 stocks, a trend that could sustain downward pressure on their returns in the near term. In contrast, the revisions breadth for the remaining 493 companies in the S&P 500 have stabilized, reflecting a leveling off in expectations for these constituents.

Figure 5: US Index Valuation Yields — **Figure 5: NDR Recession Probability Model**

TECHNICALS/SENTIMENT

In light of the recent sell-off in equity markets, sentiment indicators have shifted to markedly pessimistic territory. The AAII Investor Sentiment Poll has approached levels last observed in 2022 and during the 2008-2009 Great Financial Crisis. Historically, such extreme readings have often coincided with short-term troughs in equity prices.

**Figure 6: AAII Investor Sentiment Bull minus Bear Spread**

While trade war and tariff rhetoric appear to have triggered the most recent equity market pullback, underlying weaknesses were already emerging. The dominant themes of 2024—a handful of technology stocks propelling broader equity indices higher, alongside GDP and job growth fueled primarily by government debt—had begun to show signs of strain. We are now witnessing the early stages of a reversal: the same technology names that previously drove market gains are now contributing to its decline, while discussions around government spending reductions gain traction. We align with Bank of America’s view that both of these shifts are necessary; however, they are likely to generate near-term volatility.

At present, our models indicate that the U.S. economy remains resilient, with no recession currently priced into market expectations. As long as this stability persists, we do not anticipate a prolonged drawdown and expect equity markets to rebound once sentiment reaches the deeply pessimistic levels we are now approaching. That said, we remain vigilant, closely monitoring our models for any uptick in recession probabilities. Should such a signal emerge, we are prepared to swiftly reduce equity exposure across our strategies. For now, however, our models support a fully invested stance, with allocations tilted toward more defensive asset classes.

As always, if you have not recently reviewed your financial plan, please reach out to Natalie Brown, CFP®, to schedule an appointment.

Have a great week,

Regan Teague, CFA®, CFP®
Senior Investment Officer & Financial Advisor
Day Hagan Private Wealth

—Written 3.17.2025

Natalie Brown, CFP®, Director of Client Services

Don Hagan, CFA®, Partner, Chief Investment Strategist

Art Day, Partner, Senior Portfolio Manager

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Investment advisory services are offered through Donald L. Hagan, LLC, an SEC-registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member FINRA, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management and Day Hagan Private Wealth are both dbas of Donald L. Hagan, LLC.

MARKET UPDATE MARCH 17, 2025