The S&P 500 declined 0.8% in February while the average stock jumped 3.5%, a 4.3% divergence that may signal the most significant market rotation in years.
Monthly Market Update
- Stocks: The S&P 500 fell 0.8%, but the equal-weighted S&P 500 gained 3.5% as the average stock rose. That 4.3% divergence between the index and the median stock is among the widest in the past decade.
- US Market Leadership: Utilities led with a 10.3% gain, as value significantly outpaced growth (Value stocks rose 2.6% vs. while Growth stocks fell 3.4%).
- International Stocks: Developed markets gained 4.6% and emerging markets returned 5.5%, outperforming US stocks for a third consecutive month.
- Bonds: The US bond aggregate returned 1.6% as the 10-year Treasury yield fell to 3.9%, the lowest since October.
- Gold: Gold rallied more than 10% as investors sought protection amid equity volatility and geopolitical uncertainty.
The Index Isn’t Telling the Whole Story
For investors passively investing in the S&P 500, February looked like a soft month with the index falling just under 1%. However, that top-level performance hid significant activity beneath the surface. Investor appetite for technology (especially software and SaaS) weakened as concerns over AI shifted from “bubble” to “it’s real and taking jobs” (more on this below). The result was a sell-off and rotation out of growth and technology, and into more value based stocks and sectors.
In addition, international markets continued to outperform the US as uncertainty around the US economy and trade policies (i.e. Supreme Court’s ruling that President Trump’s tariffs were illegal) weighed on foreign capital allocations. For investors with diversified portfolios all of this likely went unnoticed, as exposure to international markets, value stocks , small/mid caps, and utilities likely drove portfolio gains in February.
In our view, this represents a meaningful structural shift away from the most concentrated market leadership (e.g. Mag7). The rotation that started in January accelerated in February, rewarding portfolios built for breadth rather than portfolios dependent on a narrow set of mega-cap names. The critical takeaway for us isn’t that mega-cap tech will stay down (we’re actually still bullish on the space). It’s that diversified portfolios no longer require mega-cap outperformance to generate positive returns, and that’s the first time that’s been true since 2022.
AI Fear Shifted From “Bubble” to “Real Industry Disruption”
February’s market weakness was different. There was weakness in Technology, but for the first time in months it wasn’t driven by valuation concerns or profit-taking – it was tied to a fundamental shift in how investors viewed AI risk. Investor mindsets shifted from “AI bubble” concerns to the realization that AI represents a legitimate set of productivity tools capable of disrupting established business models faster than expected.
This realization triggered sharp selling early in the month across software, consulting firms, real estate services, and freight brokers – any industry where investors thought there was genuine AI risk. The volatility stabilized mid-month as the narrative evolved from “AI replaces everything” to “AI enhances existing businesses.”
Looking ahead, we think investors should expect continued volatility in the broader market, especially as AI narratives and adoption unfolds unevenly. Maintaining a diversified portfolio, especially one that isn’t reliant on a specific AI theme, is essential. Portfolios concentrated in one view experienced volatility, while portfolios built for multiple scenarios participated in the rotation without requiring a perfect forecast.
What Matters Now
February was a busy month filled with market noise and political uncertainty. The result is markets offering more ways to win than in years, but only if your portfolio is built to capture it. The mega-cap concentration trade that worked for three years is giving way to a market where sector dispersion, international opportunities, and quality fixed income all contribute.
That isn’t to say we are advocating investors chase the latest sector or abandon technology. In fact, we still continue to believe growth and technology stocks will do well going forward. However, if your portfolio is still dependent on a handful of mega-cap names to carry your portfolio, February was a wake-up call.
If your portfolio needs a rebalance, the time to rebalance isn’t after another -10% month in growth stock. It’s when markets give you rotation, not capitulation. Contact us today to discuss your financial plan and portfolio structure.
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