Understanding the Current Market Selloff

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Linmaio Xu, Unsplash

Recap of Year-to-Date Market Performance

Stocks started 2025 trading higher but have since pulled back. The S&P 500 has declined more than -8% from its all-time high on February 19th, lowering its year-to-date return to -5%. The Nasdaq 100, an index of technology and growth stocks, is down -7% year-to-date, while the small-cap-focused Russell 2000 has fallen -9%. The Magnificent 7 group includes Microsoft, Apple, Meta, Alphabet, Amazon, Nvidia, and Tesla, and it has declined by nearly 15%. Given the recent volatility, our team wanted to discuss the current environment and provide a market update.

What is Behind the Market Selloff?

Several factors are contributing to the current market selloff. First, momentum stocks that led the 2024 rally are now experiencing a sharp reversal. The chart below shows 2024’s top performers have become 2025’s underperformers. Technology stocks, the Magnificent 7, and Large Cap Growth powered last year’s gains fueled by enthusiasm for the artificial intelligence industry. However, the concentrated rally led to stretched valuations and crowded positioning, particularly among the biggest companies. As those stocks lose momentum, it triggers a rapid unwind, with a large amount of capital rotating simultaneously. Second, investor exposure to the stock market was high entering 2025. Households’ allocation to stocks reached a record high, and institutional investors, such as pension funds, endowments, and insurance companies, increased their leverage and equity exposure last year as stocks traded higher. Institutional investors and hedge funds are now deleveraging, adding to the selling pressure. Third, optimism around the Trump administration’s pro-growth policies has given way to concern, with worries that spending cuts and the uncertainty created by tariffs will slow economic growth.

Market Volatility vs. Economic Reality

Market volatility can be unsettling, but it’s a normal part of investing. Periods of enthusiasm often lead to recalibration. It is natural to feel uncertain, but history shows that staying invested through volatility and maintaining a longer-term view is a prudent approach. Since 1928, the S&P 500 has experienced a decline of -5% or more in 91 of the past 98 years. Yet, markets have demonstrated an ability to recover and rewarded patience. By maintaining a diversified portfolio aligned with your long-term goals, we are positioned to weather the market’s swings.

S&P 500 Performance

US Market Performance Comparision (2024 vs 2025)

US Weekly Economic Index

US High Yield Bond Spreads (Since 1997)


 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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Market Selloff, Credit Spreads, Labor Market, Fed Next Week
Market Selloff, Credit Spreads, Labor Market, Fed Next Week

The stock market selloff extended into a third week, with the S&P 500 falling nearly -4% and entering correction territory (-10% below its February peak). Selling pressure remains on mega-cap stocks, with the Nasdaq 100, Growth factor, and Magnificent 7 leading the decline. The Low Volatility, Value, and Equal Weight factors outperformed the S&P 500, while defensive sectors outperformed cyclical ones.

Understanding the Current Market Selloff
Understanding the Current Market Selloff

What’s Behind the Market Selloff? First, momentum stocks that led the 2024 rally are now experiencing a sharp reversal. Second, investor exposure to the stock market was high entering 2025. Third, optimism around the Trump administration’s pro-growth policies has given way to concern, with worries that spending cuts and the uncertainty created by tariffs will slow economic growth.

The Market Navigates Economic and Policy Uncertainty in February
The Market Navigates Economic and Policy Uncertainty in February

Stocks traded lower in a late-month sell-off as sentiment weakened. The S&P 500’s decline erased most of its post-election gains, which expectations for stronger growth and deregulation under the new administration had driven. Smaller companies underperformed, with the Russell 2000 ending the month more than -10% below its late November peak. Under the surface, the January market rotation continued as last year’s outperformers lagged. The Magnificent 7, a group of mega-cap tech stocks that drove most of 2024’s gains, fell by -8% and dragged down the Nasdaq 100, the Large Cap Growth factor, and the S&P 500.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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