While broad global market indices remained relatively flat in February, significant shifts took place beneath the surface. Geopolitical risks resurfaced, post-election sector winners reversed course, and investors reassessed growth expectations against stretched valuations. However, the sharper divergence we are seeing across regions and sectors can also create opportunities for investors who can look beyond short-term noise.
A shift in post-election optimism
Following a steady start to the year, market volatility crept back in over February, marking a sharp reversal in some of the post-election optimism. The assumption that a Trump presidency would be a market-friendly tailwind has quickly been tested, with several of the sectors that rallied immediately after the election now under pressure.
Even after posting strong earnings, market darling Nvidia has nose-dived 24% from its January peak, wiping out over $800 billion in value. The broader Magnificent 7 of large-cap US growth stocks has also entered correction territory, none more so than Tesla, which has fallen 44% from its post-election high as enthusiasm around Elon Musk’s ties to Trump faded. Small-cap US stocks, initially expected to benefit from Trump's "America First" stance, have also struggled.
At the same time, the longstanding trend of US market dominance has shifted. Investors are beginning to question whether lofty US equity valuations remain justified, as concerns grow around the economic outlook and signs of strain in consumer confidence. As a result, Europe has outperformed, and Chinese tech stocks have surged, marking a rare departure from the American exceptionalism that has defined much of the past decade.
Ukraine & tariffs – policy uncertainty fuels volatility
At the start of the month, the White House appeared to be using tariffs merely as a bargaining chip, with Trump announcing 25% tariffs on Mexico and Canada, only to suspend them the very next day. However, as the month progressed, the policy outlook became increasingly erratic.
Initially dismissed as political posturing, markets were forced to reassess as it became clear the tariffs were in fact going into effect. This kind of unpredictable policymaking unsettles markets and has fuelled a bout of volatility in recent days. Beyond the immediate disruption to trade, tariffs have also revived concerns over slowing growth and the risk of inflation reaccelerating – a combination that markets are struggling to price in.
Geopolitical tensions also escalated within the Oval Office as February came to an end, with a public spat between Ukrainian President Zelensky and Trump leading to a complete pause in US aid to Ukraine in early March. In response, European leaders have scrambled to assemble defence spending packages, sending European defence stocks sharply higher.
Volatility creates opportunity
These issues are likely to dominate headlines in the coming weeks, but it’s important not to get side-tracked from your long-term investment goals. History has shown that selling and sitting on the sidelines during periods of uncertainty can be costly for long-term wealth creation.
Heightened volatility often brings opportunities for long-term investors, as sharp market moves can create mispriced assets. The recent sell-off in selected popular stocks is also a good reminder that the best opportunities can often be found in unloved parts of the market.
This can be seen in certain parts of the European equity market. While European stocks have had a strong start to the year, they remain cheap relative to the US and should also benefit from some recent improvement in economic indicators. UK equities, after years of being unloved, are now at their most attractive valuations in over a decade. Many high-quality UK small-cap companies are outpacing global and larger competitors in earnings growth yet remain overlooked.
Beyond the Magnificent 7, broader US equity valuations also remain reasonable. Some of the remaining 493 companies in the S&P 500 offer compelling opportunities outside of the most crowded parts of the market.
While short-term market swings can be distracting, staying disciplined and searching for value in overlooked parts of the market can be a significant driver of long-term returns.
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