While the stock market has fallen through the first three and a half months of the year, certain trends are still in place. For example, international stocks are still outperforming US stocks, bonds are still steady, and the AI trade is still in a cooling off period (though showing some positive signs).
International is still outperforming the US
Even as tariff turmoil has gripped global markets, international stocks have consistently done better than US stocks since President Trump was sworn into office. We wrote about this observation exactly one month ago, before the worst of the recent market sell off. At the time, international stocks were up 8% on the year compared to a 4% drop for the S&P 500 (a 12% spread in favor of international). As of this writing, international stocks are up 3.50% versus a 7.75% decline for the S&P 500, maintaining an 11% spread in favor of international stocks. Eventually, how the year is going becomes how the year went, and it looks like 2025 could see continued outperformance in favor of international stocks.
This is a good time to review your allocations and make sure you are properly diversified across both US and international markets. Investors ended 2024 with a record high allocation to US equities, suggesting 2025 may have caught them off guard.
Bonds are still steady and attractive
One stark difference between the 15%-20% drop we just saw in stocks and the one we saw in 2022 is that bonds are trading much better. 2022 was a brutal year that saw stocks fall 18% on the year and bonds fall 13%. This punishing combination made it very hard to avoid 10%+ losses that year. 2025 is so far showing much better signs for bonds. While bonds did fall about 2.50% from their peak values, they are still flat to 1% higher on the year. The effect is that balanced portfolios with 20-40% bond allocations are only down 2-4% on the year. While no one likes losing money, bonds are doing their job as far as acting as a diversifier to stocks.
We would note that much was made of the recent crash when the S&P 500 fell 12% in three days and bonds also fell, but three days does not make a trend. We wrote last November about a “buy more” environment in bonds and we still feel that to be the case. Recent inflation reports show core inflation moved to a four year low, which is a positive development for the bond market. Over the last 50 years, when the inflation rate is below the 10 year treasury yield, bonds have averaged a 12 month return of 8%. 
Of all of the things to be concerned about, we view concerns over the bond market as overblown. One strategy to consider is a treasury barbell, where you pair short-term treasury bills (0-2 years) with longer-term bonds (7-10 years).
The AI trade is still in a cool off phase, but…
We first wrote about the MAN back in the summer of 2023. The MAN stands for Microsoft, Apple, and Nvidia. These three stocks, and especially Microsoft and Nvidia, are seen as the two leaders in the AI sector; Microsoft for their large investment in OpenAI, and Nvidia for their semiconductor chips that are powering AI technology around the world. These stocks led the S&P 500 higher from its October 2022 bottom but started to cool off last year. One way to think about these stocks, and the AI theme in general, is through a leadership position. These are the largest stocks (by market value) in the S&P 500, so their performance has an outsized impact on S&P 500 performance.
The bad news: these three important stocks are still in general downtrends with Microsoft down 8% year-to-date, Apple down 17%, and Nvidia down 19%.
The good news: they look like they’ve all started a bottoming process and might be done going much lower.
Here’s the context we’re looking at: all three stocks topped together in July 2024 and then had large declines into last August’s market panic. Since then, the stocks have been mostly dead money. However, during the most recent decline, Microsoft, Apple, and Nvidia have been able to stay around where they traded last August. This suggests the market might view the current prices as fair value.
Keep an eye on these important stocks, we’d view the following as good signs for the health of the S&P 500:
- Microsoft able to get back over $400 ($389 at the time of this writing)
- Apple able to stay above $200 ($202)
- Nvidia able to stay above $100 ($112)
How these three stocks perform will go a long way in determining if the the S&P 500 bottomed earlier this month or is going to start selling off again.
Through it all, trends are staying consistent
Even though the stock market has been a rollercoaster over the last few weeks, trends from early in the year are still in place. International stocks are outperforming US stocks, the bond market remains relatively steady, and the AI trade is stuck in a dead money phase. Now that the market has calmed down a little bit from the worst of its panic, it is an opportune time to evaluate your portfolios and consider any strategic adjustments in light of these trends.
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