Why February Was Probably Not the Top: A Deep Dive with DataTrek Research

The "What Did We Learn?" team, featuring Josh Brown, Nick Kolis, and Jessica Rabe, dissects current market anxieties, arguing that while historical precedents like 1994 offer caution, today's tech-driven market and evolving corporate landscape may chart a different course, provided policy shocks are navigated successfully. This discussion suggests that the early-year market peak might be a temporary setback rather than the definitive top, hinging significantly on stable policy and the continued outperformance of resilient, tech-forward companies.

Key Insights

1. February Peak Anomaly: 1994 Redux or a Divergent Path?

Speaker: Jessica Rabe

Quote: "Since 1980, there's only been two years when [the S&P 500] peaked in February and that's 1994 and this year to date... it's very rare for the S&P to peak early in the year, but when it does, calendar year returns are disappointing."

Jessica Rabe of DataTrek Research highlighted a rare historical pattern: the S&P 500 peaking in February has only occurred twice since 1980 – in 1994 and the current year. Historically, such early peaks signal disappointing calendar year returns. In 1994, the S&P 500 delivered a mere 1.3% total return, significantly below its long-term average. The parallel drawn is the presence of a major negative macro surprise. In 1994, it was the Federal Reserve's unexpected and aggressive monetary tightening cycle. This year, the shock came from aggressive U.S. trade and tariff policies, which, like the 1994 Fed actions, caught markets off guard.

However, Rabe pointed out crucial differences. While the current year's trade policy shock initially caused a deeper market pullback than the 1994 Fed policy shock, the rebound has been notably swifter. This quicker recovery is attributed to the administration's rapid policy adjustment—delaying tariffs in response to market volatility. The key lesson from the 1994 playbook, according to Rabe, is the critical need for smooth trade negotiations. If policy disruptions remain contained, unlike the series of unpredictable rate hikes in 1994, U.S. equities have a stronger chance to rally. The market's current stance suggests an optimistic outlook that this year won't mirror 1994's prolonged policy uncertainty, but this hinges on continued positive developments on the trade front.

Actionable Takeaway: Investors should closely monitor trade policy developments. Positive resolutions or a stable policy environment could signal continued market strength, differentiating the current scenario from the challenging 1994 precedent. Conversely, escalating trade tensions could revive fears of a 1994-style market stagnation.

2. The Ghost of '94: How Policy Shocks Reshape Market Leadership

Speakers: Nick Kolis, Jessica Rabe

Quote (Nick Kolis): "If you want to pinpoint the beginning of the 95 tech bubble... it was because of this rotation in 94, because investors started saying, oh, if the Fed's raising rates, I need to go to growth stories. And that laid the groundwork for the entire 95 to 2000 tech boom."

Nick Kolis, also from DataTrek Research, provided firsthand context on the 1994 Fed tightening. He recalled the February 1994 rate hike announcement as a shock, being the first time the Fed issued a same-day press release. The Fed, concerned about nascent inflation and an overheating economy, embarked on a series of rate hikes totaling 250 basis points that year. This aggressive stance, coupled with what the Fed later admitted was insufficient market communication, created significant investor uncertainty.

A crucial, and perhaps underappreciated, consequence of the 1994 policy shock was a significant market rotation. Kolis, an auto analyst at the time, noted that cyclicals, the market darlings from 1991-1994, abruptly fell out of favor. This shift forced investors to seek alternative growth avenues, leading them towards technology stocks. This rotation, born out of the Fed's actions, inadvertently laid the foundational investor sentiment for the massive tech boom that characterized the latter half of the 1990s. Jessica Rabe reinforced this by emphasizing how policy shifts can "trump fundamentals," leading to fears of recession and significant earnings declines, thereby triggering strong market reactions and reallocations.

Actionable Takeaway: Major policy shifts, whether monetary or fiscal, can trigger significant rotations between market sectors and investment styles. Investors should be aware that such shocks not only create volatility but can also sow the seeds for new long-term leadership trends, as seen with the shift towards growth and tech post-1994.

3. Tech's Valuation Premium: A Bet on Future Dominance, Not Just Current Earnings

Speaker: Nick Kolis

Quote: "70% of Nvidia's value is based on earnings growth that it doesn't have yet... The market is saying gen AI, all these new technologies... the companies that will enjoy those gains are the big seven."

Nick Kolis introduced a compelling framework for understanding technology stock valuations. By discounting a company's current consensus earnings (e.g., 2025 estimates) into perpetuity at a 10% rate, one can derive a "current earnings power value." The difference between this value and the actual stock price represents the premium the market assigns to future, yet-to-be-realized earnings growth. For Nvidia, this calculation reveals that approximately 70% of its market value is predicated on future earnings. The average for the "Big Seven" tech stocks is 68%. This contrasts sharply with the S&P 500 excluding Big Tech, where only 35% of value is attributed to future growth. Extreme cases like Tesla and Palantir see over 94-95% of their value tied to future expectations.

This valuation disparity, Kolis argued, signifies a clear market conviction: the transformative economic benefits of emerging technologies like generative AI are expected to accrue predominantly to these established tech giants and similar disruptors. Investors in companies like Tesla and Palantir, as Josh Brown noted, are explicitly betting on future breakthroughs (robotics, AI contracts) rather than current operational results. The market has learned from the past three decades that technology-enabled disruptors often deliver outsized returns, making it seemingly "easier to bet on tech" due to underlying tailwinds like Moore's Law.

Actionable Takeaway: When evaluating high-growth tech stocks, investors must recognize the substantial portion of their valuation tied to future, unproven earnings. This implies higher risk but also reflects the market's strong belief in their disruptive potential. Diversification and a clear understanding of the long-term narrative are crucial.

4. The "Magnificent Seven" Earnings Engine: Consistently Justifying the Hype

Speakers: Josh Brown, Nick Kolis

Quote (Josh Brown, paraphrasing sentiment): "Just from an earnings standpoint, it explains why people keep making that bet [on Big Tech] and why that bet keeps paying out."

Josh Brown highlighted the remarkable and consistent earnings outperformance of the "Magnificent Seven" (Mag 7) tech companies, which underpins their premium valuations. In the recent Q1 earnings season, these giants exceeded earnings estimates by an average of 14.9%, nearly double the 8% beat for the broader S&P 500. Their actual earnings grew by an impressive 27.7% year-over-year, with companies like Google, Nvidia, and Amazon being among the top five contributors to overall market earnings growth. Even with some dispersion in stock performance (Meta and Microsoft up, Tesla and Apple down year-to-date at the time of recording), six out of seven Mag 7 companies posted positive earnings per share surprises.

Nick Kolis added that while the long term is the ultimate horizon, it's built from a series of strong quarterly performances. Each positive earnings surprise reinforces investor confidence in the long-term narrative. Given that these seven companies constitute roughly 32% of the S&P 500's market capitalization, their performance is not just a niche story but a dominant market force. Jessica Rabe also noted that markets historically struggle to accurately discount innovative disruption over the long run, often leading to sustained outperformance by these types of companies.

Actionable Takeaway: The consistent ability of Big Tech to deliver earnings growth above expectations is a primary driver of their sustained leadership. Investors should continue to monitor their earnings reports closely, as any significant deviation from this trend could signal a shift in market sentiment or underlying fundamentals.

5. Corporate Evolution: Are Today's Companies Truly More Resilient?

Speakers: Josh Brown, Nick Kolis

Quote (Nick Kolis): "Investor sentiment is always going to be the same. People will always fear a recession the minute they see a reason to do so... that net psychological effect is always going to be about the same."

Josh Brown posited that corporations today might be inherently more resilient and better managed than their counterparts in previous eras, such as 1994. He drew an analogy to NBA players, suggesting that the average company today, much like the average professional basketball player, operates at a higher level of sophistication and adaptability to shocks like inflation or supply chain disruptions. This increased global footprint and operational prowess, he argued, might mean that companies in the current era can weather exogenous shocks better than those in 1994.

However, Nick Kolis offered a counterpoint, emphasizing the enduring nature of investor psychology. While companies may have evolved, the fear of recession and its impact on markets remains a constant. "Corporate earnings aren't guaranteed," he stated, and when faced with significant policy shocks or economic uncertainty, investors will react similarly by de-risking, irrespective of perceived improvements in corporate management. The key to market recovery, then, is not just corporate resilience but fixing the underlying cause of the shock. This suggests that while individual companies might be better, systemic shocks will still provoke classic market fear responses.

Actionable Takeaway: While improved corporate fundamentals can provide a buffer, investors should not underestimate the power of macroeconomic shocks and investor sentiment. A diversified approach that respects potential systemic risks remains prudent, even if individual company resilience appears high.

6. The Asset-Light Advantage: Why Emulating Big Tech is a Tall Order

Speaker: Nick Kolis

Quote (Nick Kolis): "The reason these companies [Big Tech] are as strong as they are is primarily because their business models are very asset light... It's very hard for a company, particularly in the current environment now, to shape its capital structure or its capital intensity dramatically to lighten it up."

Responding to Josh Brown's question about whether the broader S&P 493 could adopt Big Tech strategies, Nick Kolis expressed skepticism. He pointed out that a core strength of many leading tech companies is their asset-light business model. They primarily own intellectual capital and outsource physical production (e.g., Apple, Nvidia). This allows for greater scalability, higher margins, and adaptability. In contrast, traditional industrial companies like Ford or GM, which Kolis noted trade at significant discounts to their current earnings power, have massive physical asset bases and complex manufacturing operations.

Transitioning from an asset-heavy to an asset-light model is exceedingly difficult, especially in the current environment where reshoring and domestic manufacturing are politically favored over outsourcing. Kolis referenced Apple's long journey to an outsourced manufacturing model, initiated by Steve Jobs, as an example of how challenging and time-consuming such a transformation can be, even under favorable conditions. For most incumbent, non-tech companies, replicating this asset-light advantage is largely unfeasible, limiting their ability to achieve tech-like growth profiles and valuations.

Actionable Takeaway: Investors should recognize the structural differences between asset-light tech disruptors and asset-heavy traditional businesses. While operational improvements are always possible, the fundamental business models dictate different growth trajectories and valuation multiples. Expecting widespread "tech-ification" of the old economy may be unrealistic.

Notable Quotes

Jessica Rabe: "The lesson from our 1994 playbook is that trade negotiations need to go smoothly in order for US equities to rally from here."

Nick Kolis: "The market's very clearly saying, hey look, we've learned our lesson. Over the last 30 years the biggest winners have been technology enabled disruptors. That's what these companies are, that's why we have to bet on them."

Nick Kolis (on Tesla's valuation): "94% of its value is driven by earnings it hasn't made yet and earnings power it has not shown that it can make yet. So basically the entire thing."

Market Implications

The discussion led by Josh Brown with Nick Kolis and Jessica Rabe suggests that while the February market peak served as a stark reminder of vulnerability to policy shocks, it may not signify the end of the current bull run. The key differentiating factor from historical precedents like 1994 appears to be the market's conditional optimism, primarily hinged on the successful navigation of trade policies and the continued robust performance of technology leaders.

For investors, this implies a nuanced outlook:

1. Policy is Paramount: The 1994 analogy underscores that sustained, unpredictable policy shocks can derail markets. Investors should prioritize monitoring geopolitical and domestic policy developments, particularly concerning trade. A stable or improving policy landscape could unlock further upside, validating the idea that February wasn't the ultimate top.
2. Tech Leadership Endures, But With High Stakes: The significant valuation premium for Big Tech is a clear bet on their continued ability to innovate, disrupt, and deliver superior earnings. While their track record supports this, the high proportion of value based on future earnings means any faltering in this narrative could lead to sharp corrections. Investors in this space are implicitly underwriting substantial future growth.
3. Selective Opportunities Beyond Tech: While emulating Big Tech's asset-light model is difficult for most, well-managed companies in other sectors can still offer value. However, the market is assigning a much lower premium for future growth outside of tech, suggesting a more conservative valuation approach is warranted for these names.
4. Rotation Vigilance: As seen in 1994, policy shifts can trigger significant market rotations. While tech currently reigns, investors should remain alert to potential catalysts – economic, policy-driven, or technological – that could shift leadership elsewhere.

Ultimately, the argument that "February was probably not the top" is not a guarantee but a probabilistic assessment based on current conditions and historical parallels. It suggests that if policy headwinds subside and the tech sector's earnings power remains intact, the market has scope for further appreciation. However, the cautionary tales from the past, particularly regarding the disruptive power of unexpected policy shifts, remain highly relevant.