US Stock Markets Face a Tough March After Trouble in February

US stock markets struggled in February. They might be in for harder times ahead in March.

• S&P 500 posted its first monthly drop in three months in February
• Tech stocks lagged while markets outside the US hit record highs
• Gold rose over 10% and bonds surged, but the dollar is holding up

The S&P 500 posted its first monthly decline in three months, slipping 0.87% in February. The drop is modest, but it is the largest since April 2025, when markets were rattled by the unveiling of US President Trump’s tariffs regime. The tech-heavy Nasdaq fared worse, down 2.32% for its biggest slide since March 2025.

Technology stocks are at the center of the weakness. The State Street Technology Select Sector SPDR ETF (XLK) fell 3.56% to its lowest close in five months. Concerns seem to be mounting that the artificial intelligence (AI) boom has stretched valuations beyond a reasonably extrapolated growth path. Software companies’ stocks have come under particular pressure amid fears that AI could disrupt their enterprise business models, not enhance them.

US stock markets are lagging global peers, especially in Asia. Why?

Yet the story is not one of broad-based equity distress. The S&P 500 excluding technology (ETF: SPXT) is up 1.09% this month, marking a record high. Markets outside the United States are faring even better. The MSCI All-Country World Index of stocks excluding the US (ETF: ACWX) has surged 5.19% to its own record. AI-linked markets in Asia have been especially strong, with South Korea’s KOSPI up nearly 50% year-to-date and Taiwan’s TAIEX also rallying sharply, up over 22%.

At first glance, this appears to signal capital rotation away from US assets. However, the US dollar has remained relatively stable throughout February. It managed a modest rise of 0.23% against an average of the greenback’s top currency rivals like the euro and the Japanese yen. If capital were truly fleeing dollar-denominated markets wholesale, the currency would likely be under greater pressure.

That suggests something else is unfolding.

Crude oil prices climbed for a second consecutive month amid speculation about regime change in Iran and stepped-up enforcement against Russia’s so-called “shadow fleet” tankers, with France and India joining US efforts. Expectations of a supply glut seem to be fading. At the same time, gold prices surged 10.6%, posting their biggest monthly rise since March last year.

Taken together, this looks less like geographic rotation against a broadly positive global backdrop and more like de-risking.

Investors appear to be trimming exposure to crowded speculative narratives – notably, the one powering US mega-cap tech names – while increasing allocations to defensive assets. The dollar’s resilience may reflect its unrivaled liquidity as a venue to cash out in periods of uncertainty rather than enthusiasm for US growth prospects.

Are global markets going into defense mode?

Some capital is clearly flowing to AI catch-up trades outside the US, and it is not surprising that less-liquid markets are outperforming accordingly. The MSCI Asia-Pacific stock index has a market capitalization of about $15 trillion, while just the “magnificent seven” tech stocks themselves exceed $20 trillion. However, large pools of money are also clearly bound for defensive assets.

Bond markets seem to reinforce this. Traders have now fully priced two Federal Reserve interest rate cuts this year – double the projection offered up by central bank officials in December – and are increasingly flirting with the possibility of a third one in 2027. Treasuries have rallied accordingly.

The rhetoric from Fed officials seems to be pulling policy the opposite way, however. Minutes from January’s FOMC meeting carried a hawkish tone, with some policymakers even discussing the possibility of putting rate hikes back on the table. Core PCE inflation – the Fed’s preferred price growth gauge – returned to 3% for the first time since April 2024 in December, even as economic growth slowed in the fourth quarter.

Markets seem eager for the insurance of cheaper money in an environment of geopolitical tension and stretched valuations. The Fed, bound by its dual mandate focused on maximum employment and price stability, seems resigned to wait until something truly breaks in the economy or the markets. That divergence sets the stage for an uneasy March ahead.

Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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