How Wall Street pros are looking at fears over a US market slowdown

Nasdaq Drops 4% in February, S&P 500 and Dow Also Decline

February proved to be a challenging month for investors as economic concerns and shifting market sentiment led to volatility across major stock indices. The Nasdaq Composite (^IXIC) fell by 4%, while the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) posted losses of 1.4% each.

Market turbulence was fueled by a mix of weaker consumer confidence, soft consumer spending data, and a broad sell-off in momentum stocks that had dominated earlier in the year.

“The fear here among a lot of investors now [has] become that the economy could be slowing down faster than the Fed is willing to react, which is a tough situation,” said Steve Sosnick, Chief Strategist at Interactive Brokers, in an interview with Yahoo Finance.

Tech Stocks Lead the Downturn, Dow Outperforms

Technology stocks, which had been some of the strongest performers in early 2025, bore the brunt of February’s sell-off. The Nasdaq, which is heavily weighted towards tech and momentum stocks, saw the steepest decline among major U.S. indices.

In contrast, the Dow Jones Industrial Average showed relative strength, largely due to its lower exposure to technology stocks and a higher weighting towards defensive sectors like Consumer Staples (XLP).

“This is an environment either to lighten up [on stocks], raise a little cash, which, considering the cash is still paying you 4%, is not a terrible place to be,” added Sosnick. He further suggested that investors looking to stay in equities may want to shift towards low-beta and high-dividend stocks, which tend to be more resilient in volatile market conditions.

Market Debate: Economic Slowdown or Sector Rotation?

A key question looming over the markets is whether this recent weakness reflects genuine concerns about economic growth or if it’s simply a normal sector rotation as investors take profits from prior winners.

Analysts at Yardeni Research argue that the market is in the middle of another “growth scare”, similar to what occurred in the summer of 2024.

“The latest batch of economic indicators has been weak,” said Ed Yardeni and Eric Wallerstein in a recent note. “The current growth scare is reminiscent of last summer’s scare.”

Last year, a similar decline in the S&P 500 saw the index drop nearly 10% from peak to trough, only to recover to new all-time highs by November.

Tighter Monetary Policy Could Shift Investor Strategies

Adding to investor anxiety is the Federal Reserve’s decision to maintain high interest rates, which effectively acts as a passive tightening of monetary policy.

“The economy does appear to be softening, and the Federal Reserve’s decision to keep rates elevated amounts to a passive tightening of monetary policy [that] is the dominant risk and has important implications for financial market investors,” noted Neil Dutta, Head of Economics at Renaissance Macro.

However, Dutta believes that the recent market movement is not entirely driven by recession fears, as some key indicators remain resilient.

“If it was a real recession story, you’d expect financial stocks to be underperforming. You wouldn’t see Europe outperforming,” he told Yahoo Finance. “There’s a lot of things going on that are not really consistent with the growth scare.”

Defensive Plays Could Gain Popularity in Coming Months

If investors become more convinced that economic conditions are worsening, Dutta predicts a shift towards more defensive assets.

“If you have a massive tightening of monetary policy, that will put further downward pressure on economic growth and should push investors to take more defensive positions in the equity markets,” he said.

Among the sectors that could see increased demand, Dutta mentioned:
✔ Consumer Staples (XLP) – Companies that sell essential goods, such as food, beverages, and household items, tend to perform well in uncertain economic conditions.
✔ Utilities (XLU) – Defensive utility stocks are known for their stability and strong dividend payouts.

Additionally, Dutta expects investors to increase their positions in the Treasury market, betting that the Federal Reserve will eventually adjust its policy to support economic growth.

“I think the Fed will do the right thing,” he noted, “but there could be some pressure between now and then.”

Key Takeaways: What’s Next for Investors?

✔ Volatility remains high: The Nasdaq’s 4% drop shows that investors are shifting away from tech and momentum stocks.
✔ Sector rotation is underway: Defensive plays like Consumer Staples (XLP) and Utilities (XLU) may see increased demand.
✔ Recession fears vs. rotation debate: Analysts are split on whether this sell-off is an economic warning sign or a normal market rotation.
✔ The Fed’s next move matters: Investors will closely watch the Federal Reserve’s policy stance to determine if rates stay elevated longer than expected.

As March begins, all eyes will be on incoming economic data, Federal Reserve statements, and whether the market stabilizes or enters deeper correction territory.

Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.

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