Market Insights

Stocks may have experienced a “false breakout” as investors worry about inflation, jobs and economic growth.

The S&P 500 fell 1.7 percent between Friday, February 14, and Friday, February 21. It was the third negative week in the last four and the biggest weekly drop since early January.

Prices also failed to hold a new all-time high above 6,100. Some chart watchers may consider that false breakout a potentially bearish reversal pattern.

“The upbeat mood seen among US businesses at the start of the year has evaporated,” S&P Global economist Chris Williamson said on Friday. He added that prices are rising because of tariffs and orders are falling because of worries about federal-spending cuts.

His indexes showed service activity contracting for the first time in 25 months, while raw-material costs rose the most in 28 months. A separate report from the University of Michigan revealed a sharp deterioration in consumers’ sentiment and economic outlooks as inflation worries grew.

“Uncertainty over the scale and scope of tariffs has builders further concerned about costs,” Robert Dietz, chief economist at the National Association of Homebuilders, said earlier in the week. His group added that construction firms expect weaker sales and are less inclined to lower prices because of the uncertainty.

Risk-Off Trade

Stocks and groups associated with risk taking fell the most last week:

• Consumer discretionaries were the worst-performing major sector. Cruise-ship operators led the selling after newly installed Commerce Secretary Howard Lutnick threatened to close a tax loophole. Homebuilders also dropped and Amazon.com (AMZN) fell the most since July.
• Materials, industrials and financials lagged. Those are traditional cyclical-growth stocks that benefit from a strong economy. Their weakness may reflect less optimism about the business cycle.
• The Russell 2000 small cap index had its biggest weekly drop since mid-December. It hasn’t made a new 52-week high since late November and remains below record peaks from late 2021. The Russell 2000 also closed below its 200-day moving average for the first time since November 2023.

Meanwhile, “safe havens” like utilities, consumer-staples and bonds advanced. That kind of price action is also potentially consistent with increased caution.

Chinese stocks rose, partially because of strong results from Alibaba (BABA).

Walmart (WMT) fell sharply last week despite reporting strong results. The retail giant had doubled since the beginning of 2024 thanks to successful IT breakthroughs (including AI tools). Could that suggest the market is losing interest in tech-fueled growth?

Software Slides

Software and IT-services were some of the worst-performers last week. Akamai Technologies (AKAM) fell the most since 2008 after guidance missed estimates. EPAM Systems (EPAM) also issued a conservative outlook, saying “2025 will be a year of transition … [ until ] … demand returns to more normalized levels.”

Palantir Technologies (PLTR), one of the top-performing large stocks in the last year, fell sharply. Political uncertainty contributed to the drop after President Donald Trump and Defense Secretary Pete Hegseth called for cuts to military spending.

Axon Enterprise (AXON), which also soared in recent years on public-sector demand, fell the most since 2008 on worries about increased competition.

In another government-related move, UnitedHealth (UNH) fell the most since the pandemic after The Wall Street Journal reported the Justice Department was investigating its business practices. The news came a month after a successful legal fight with the Centers for Medicare & Medicaid Services.

S&P 500, daily chart, with select patterns and indicators.

Charting the Market

Last week showed potential signs of fatigue, which may have been bolstered by the false breakout.

The moving average convergence/divergence oscillator (MACD) turned negative and prices closed below the 8- and 21-day exponential moving averages. Those patterns may reflect weakening momentum.

Prices have also stayed near  their 50-day moving average since mid-December. That contrasts with periods last year when the index stayed above its 50-day MA for several months at a time. Is the intermediate-term trend fading?

Next, investors may worry about relatively high valuations after the S&P 500’s forward price-to-earnings ratio climbed past 22. That’s above its levels in early 2022, at the start of its last bear market. The high multiple may create risk if estimates get cut because of policy changes like tariffs.

One potential sign of the reluctance was shown by Warren Buffett, who’s amassed a record stockpile of uninvested cash at Berkshire Hathaway (BRK.B).

The Week Ahead

This week’s big event is Nvidia (NVDA) earnings on Wednesday afternoon. There are also some economic reports of middling importance before February ends.

Nothing important is scheduled for today.

Consumer confidence is tomorrow, along with earnings from Home Depot (HD), Workday (WDAY) and First Solar (FSLR).

Wednesday features new-home sales and crude-oil inventories. NVDA reports after the closing bell, along with Salesforce.com (CRM), Snowflake (SNOW) and eBay (EBAY). Lowe’s (LOW) and TJX (TJX) report in the premarket.

Thursday’s big item is revised gross domestic product for the fourth quarter. Initial jobless claims and durable-goods orders are also due. Some of the noteworthy earnings include Dell Technologies (DELL), HP (HPQ) and Norwegian Cruise Lines (NCLH).

The personal consumption expenditures (PCE) price index is on Friday. This important inflation measure is reported along with personal income and spending.