In the past two weeks, we have started to see volatility re-emerge within equity markets. Thus far, the headlines appear a bit scarier than reality: the S&P is down just 5% from its highs (including today’s 1.7% decline) and is down approximately 0.3% so far in 2025. This follows, of course, two very robust double-digit performance years for the market. A simple look at the market over the last few years illustrates that the current “drawdown” is still pretty nascent as compared to the bear market of 2022.
Individual names in the tech world, however, are seeing more impact. The NASDAQ, a technology focused index, is down roughly 8% from its highs while the Magnificent 7 stocks are off ~15%. Nvidia, the poster child for the artificial intelligence (AI) rally of the past two years, is off more than 23% - despite posting quarterly revenue up 78% year-over-year last week. The entire industry has been somewhat rattled since a Chinese AI competitor called DeepSeek announced in January that it could (supposedly) produce Chat-GPT-like functionality at just a fraction of the cost. Current declines for these stocks rival what we saw in August 2024
The volatility of the past two weeks appears to mostly have been provoked by US foreign policy. President Trump affirmed his commitment to 25% tariffs on Canada and Mexico this afternoon, precipitating today’s market declines. As we noted in our quarterly letter in January, we believe the President has a deep seated belief in tariffs and would pursue them aggressively during his term. We observed the precursors of this policy stance in 2018, when President Trump initiated a “trade war” with China. While the ultimate efficacy of such policies are debated by economists, it is clear that the mere disruption to the status quo is enough to spur uncertainty among market participants.
At the same time, economic data is suddenly faltering at the margins. On Friday, we learned that consumer spending in January fell for the first time in nearly two years. This mirrors a broader range of indicators that have begun to show some weakness, like retail sales and consumer confidence. With inflation starting to tick back higher, the Federal Reserve’s ability to move aggressively in the face of any potential economic deterioration is constrained.
To be clear, we believe it is still a bit early to write off the US economy. The consumer remains broadly healthy amid strong labor markets and the fiscal environment under the new administration should be generally favorable for Corporate America. What gives us pause – as we have repeatedly highlighted in recent communications – is that the market is very richly valued. This leaves it highly vulnerable to bad news, whether that be further deterioration in economic data, more disruptive foreign policy, or another surprise announcement that undermines the AI narrative.
As always, we remind you that periodic volatility is an inevitable part of the market experience. On the margins, we have attempted to shift portfolios toward a more conservative stance while still keeping your long-term objectives in mind. Further market dislocation is very possible; however, we also believe those are the environments of greatest investment opportunity. We look forward to keeping you updated on our latest thinking as this market evolves.
Sincerely,
Andrew Hart Ryan Davis, CFA, CAIA
Chief Executive Officer Chief Investment Officer
ahart@nextcapitalmgmt.com rdavis@nextcapitalmgmt.com
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