February 2026 Market Commentary

February marked a decisive recalibration of expectations, as escalating geopolitical risk and persistent macroeconomic uncertainty drove volatility across asset classes. Earnings season dominated headlines, unfolding alongside rising tensions in the Middle East. Nearly every week delivered a market-moving development that, in a quieter environment, would have defined the month. Instead, investors were forced to digest multiple overlapping narratives simultaneously and reassess positioning in real time.

At a high level, U.S. equities pulled back modestly, though performance diverged meaningfully beneath the surface. The S&P 500 declined 0.8% and the Nasdaq 100 fell 3.3%, while the Dow Jones Industrial Average gained 0.2%. This reflected rotation away from mega-cap growth and toward more defensive and cyclical sectors. Utilities, Energy, and Materials outperformed, while Technology and Consumer Discretionary lagged following their strong start to the year. Overall, the month was less about broad market deterioration and more about selectivity, valuation sensitivity, and disciplined repositioning amid rate uncertainty and geopolitical risk.

From a technical perspective, several trends warrant close monitoring. The Nasdaq reached an all-time high on October 29, 2025, and has since declined more than 5%. Historically, sustained Nasdaq weakness has preceded broader S&P 500 softening by approximately six months, which would place potential inflection risk around April 2026. While not predictive in isolation, this pattern reinforces the importance of vigilance as market leadership narrows and momentum shifts.

Artificial intelligence remained a central theme, with markets increasingly scrutinizing both disruption risk and capital expenditure intensity. February’s focus turned squarely to software. Weakness in application-layer names such as ServiceNow, Salesforce, and IBM reflected investor uncertainty regarding AI’s net impact on enterprise software economics. While these companies are aggressively embedding AI into their platforms, investors questioned whether generative tools—including those developed by Anthropic—could compress seat growth, alter pricing structures, or shift value capture toward infrastructure providers. The result was valuation compression driven more by narrative risk and monetization uncertainty than by any material deterioration in fundamentals.

Investors also began asking more complex questions about execution, cost, and timelines. CIO commentary suggested that enterprises are still experimenting with AI rather than committing to large, multi-year deployments. Replacing core infrastructure is costly, operationally complex, and strategically consequential. Issues such as data ownership, switching costs, and downtime remain significant barriers. In many cases, legacy systems, including IBM’s longstanding COBOL-based infrastructure—continue to underpin critical banking, insurance, government, and ATM networks where downtime is not an option. These realities suggest evolution rather than rapid displacement, even as disruption concerns continue to pressure valuations.

Amid the broader noise, the Supreme Court of the United States issued a significant ruling on tariff authority. In a 6–3 decision, SCOTUS held that the administration could not rely on the International Emergency Economic Powers Act (IEEPA) to justify broad global tariffs, ruling that trade deficits and supply-chain dependence do not constitute an “unusual and extraordinary threat.” The decision effectively invalidated the 10% tariff imposed last April under that authority, though most other tariffs enacted under separate statutes remain intact. SCOTUS offered no framework regarding approximately $129 billion in previously collected duties, leaving refund prospects legally uncertain and likely prolonged. The administration quickly pivoted to alternative statutory authority under the 1974 Trade Act, enabling temporary tariffs of up to 15% for 150 days. Despite the significance of the ruling, markets reacted modestly, interpreting the outcome as adding procedural complexity rather than providing immediate policy clarity.

Geopolitical risk ultimately crescendoed at the end of February. Throughout the month, publicly available flight-tracking data indicated a sustained movement of U.S. military assets toward bases in Europe, the Middle East, and the Indian Ocean. Carrier strike groups, guided-missile destroyers, and aircraft repositioned across the region. On February 28, Operation Epic Fury commenced, with coordinated U.S. and Israeli strikes targeting Iranian regime leadership and military infrastructure. Iran responded by closing the Strait of Hormuz—through which more than 20% of the global energy supply transits—and launching retaliatory strikes across the region.

Energy markets reacted swiftly to these geopolitical events. WTI crude rose above $77 per barrel, and Brent crude surpassed $82 per barrel as supply risks intensified. Airline stocks faced pressure amid regional airspace closures and rising jet fuel costs, while investors rotated into defense equities, precious metals, and other defensive assets. The situation remains fluid and represents a material development with potential implications for energy markets, inflation expectations, and global risk sentiment in the months ahead.

Taken together, February was defined less by a single shock and more by the convergence of technical shifts, AI-driven disruption concerns, legal and trade policy uncertainty, and escalating geopolitical tensions. Markets responded not with panic, but with recalibration—emphasizing selectivity, disciplined risk management, and a renewed focus on the durability of earnings and cash flow.

The U.S. fixed-income market for February reflected a complex interplay between macroeconomic expectations, technical supply-demand dynamics, and idiosyncratic credit events. After a period of relative flattening earlier in the year, the U.S. Treasury Yield Curve steepened, with the spread between two-year and ten-year U.S. Treasuries widening noticeably. The steepening suggested that market participants were beginning to price in a less aggressive near-term rate-cut path from the Federal Reserve. Expectations of stronger growth or more persistent inflation in the outer years further supported demand for longer maturities, while short-term yields remained anchored by monetary policy uncertainty. At the same time, municipal curves and broader securitized sectors reflected ongoing supply-demand imbalances and notable technical support, particularly at shorter and intermediate maturities.

A standout theme in corporate credit was the historic issuance from Google’s parent company, Alphabet Inc., which tapped the market with a rare 100-year bond as part of a multi-currency offering that was oversubscribed by a wide margin. The long-dated issuance—among the longest maturities ever issued by a U.S. corporate borrower—drew extraordinary investor demand as institutions sought to lock in yield on high-grade credit while financing long-term strategic priorities, notably AI infrastructure and data-center expansion. This demand underscored the continued appetite for secure income streams, even as broader fixed-income markets navigated evolving rate expectations and increased volatility.

Offsetting some of the positive technical and demand signals in public bond markets was emerging stress in the private credit space, driven in part by redemption pressures that exceeded the typical liquidity protections built into semi-liquid vehicles. Funds managed by Blue Owl Capital faced surging redemption requests that ultimately led to the permanent suspension of quarterly withdrawals in certain retail-oriented vehicles, highlighting the structural tension between long-dated, illiquid loan portfolios and periodic liquidity promises to investors. Other major private credit vehicles, including large non-traded BDCs, experienced redemption levels above their standard caps and responded by increasing limits or injecting capital to meet outflows—developments that rattled investor confidence in this rapidly growing segment of the credit markets. These events also reinforced broader concerns about liquidity mismatches, opaque valuations, and concentrated exposures, particularly to sectors such as software that have underperformed amid technological disruption.

Together, these fixed-income developments—a steepening yield curve, extraordinary long-dated corporate issuance, and emerging stress in the private credit ecosystem—defined a month in which credit markets both reflected and shaped investor perceptions of risk, liquidity, and long-term financing strategy. They also highlighted that while traditional bond markets often provide relative safety and transparent pricing signals, segments operating outside the public yield curve may face unique pressures that warrant close monitoring.

Economic data surprised to the upside as manufacturing surveys have improved and the February jobs report showed resilience. Equity leadership is rotating away from long‑duration software and toward cheaper, cash‑flow‑oriented companies. With corporate earnings beating expectations and the median stock showing its best growth in years, the broadening of market leadership supports the view that a new cycle is emerging.

The February inflation report for January 2026 showed continued progress toward price stability. The January Consumer Price Index (CPI) data released by the Bureau of Labor Statistics (BLS) indicated a modest increase. Headline CPI rose 0.2% month over month and 2.4% year over year, while core CPI (excluding food and energy) increased 0.3% for the month and 2.5% over the past year. Shelter rose 0.2% and was the largest contributor to the monthly increase. Food prices also rose 0.2%, while energy prices declined 1.5%. On an annual basis, food prices were up 2.9%, while energy prices were down 0.1%. With oil prices temporarily higher due to geopolitical risks, headline inflation may tick up in the near term. However, the underlying trend remains consistent with moderate inflation. A sustained 10% increase in oil prices typically adds about 0.3 percentage points to headline inflation. As a result, the recent spike related to tensions in the Middle East should remain manageable unless supply disruptions persist.

Prices for key agricultural commodities such as wheat, soybeans, and beef have risen sharply in 2026 due to a combination of supply constraints, weather disruptions, shifting global demand, and higher input costs across the agricultural sector. Together, these factors have tightened inventories and increased volatility in food markets. Another important factor is tight livestock supply, particularly in the cattle market. Herd sizes in the U.S. have declined in recent years, reaching levels not seen since the 1950s, as ranchers culled animals during earlier drought periods when feed and water were scarce. Rebuilding a cattle herd takes several years because of the biological cycle required to breed and raise calves, meaning supply cannot quickly respond to higher prices. As a result, beef production has remained constrained in 2026, even as demand from both domestic consumers and export markets remains strong. Finally, higher input costs across the agricultural supply chain have also contributed to rising food prices. Fertilizer, fuel, transportation, and farm equipment costs remain elevated compared with pre-pandemic levels, increasing production costs for farmers. When these costs rise, they are often passed through commodity markets and eventually reflected in higher prices for agricultural products and food at the consumer level.

The labor market remains in a “low‑hire, low‑fire” state. In the last weekly report for February, initial claims for unemployment insurance edged up by 4,000 to 212,000, while continuing claims fell —a proxy for hiring— by 31,000 to 1.833 million. Economists had expected claims to be slightly higher, and the modest increase was largely attributed to the Presidents’ Day holiday. The unemployment rate eased to 4.3% in January, from 4.4% in December, and the Chicago Federal Reserve forecasts it will hold around 4.28% in February. Businesses remain cautious about adding staff amid tariff uncertainty and the adoption of new technologies, but there is little evidence of broad-based layoffs. Labor costs often represent the largest input expense for many companies, and management teams will not hesitate to reduce headcount as AI becomes more deeply integrated into business systems. Entry-level and back-office roles are particularly exposed to automation and productivity gains from these technologies. While headlines highlighting large-scale layoffs at major technology firms are often interpreted as evidence of an impending wave of job cuts, a closer examination shows that most companies still employ significantly more workers than they did during the COVID-era hiring surge.

Consumer confidence surveys present mixed signals. The Conference Board reported that the share of consumers who believe jobs are “hard to get” reached a five-year high in February, yet households still broadly believe job availability has improved. Meanwhile, manufacturing and services purchasing managers’ surveys remain in expansion territory, albeit at modest levels. Taken together, the data suggest the economy is continuing to expand, but at a slower pace than in 2025—consistent with an early-cycle environment.

The ISM Manufacturing PMI remains one of the most widely followed indicators of the health of the U.S. manufacturing sector. It is based on a monthly survey of purchasing managers at several hundred manufacturing companies conducted by the Institute for Supply Management. Since purchasing managers are responsible for ordering raw materials, managing inventories, and monitoring demand, they often detect shifts in business conditions before those changes appear in official economic data. As a result, the index is widely viewed as a leading indicator of economic activity. Despite expectations that the ISM New Orders component would show a meaningful decline of 0.17 in January, the actual data painted a very different picture. The ISM Manufacturing PMI jumped 4.7 points, 52.6 from 47.9, pushing the index firmly back into expansion territory. Any reading above 50 indicates growth, and January’s increase marked the largest monthly gain since July 2020, signaling a sharp rebound in manufacturing activity. New Orders rose dramatically from 47.4 to 57.1, suggesting a meaningful pickup in demand across the sector. However, the report also revealed an important divergence beneath the surface. Employment remained muted at 48.1, down slightly from the prior reading of 48.8 and still in contraction territory. According to survey commentary, 66% of companies reported that they are not hiring at all, even as order volumes improve. This dynamic suggests that manufacturers are increasingly relying on automation, efficiency improvements, and productivity gains rather than expanding headcount.

The theme of productivity-driven growth has also appeared in recent corporate earnings commentary from major companies such as Walmart, reinforcing the broader narrative that technology and operational efficiency are allowing businesses to meet rising demand without proportionally increasing labor costs.

February ended with a significant geopolitical escalation, as the U.S. and Israel launched coordinated strikes against Iran under Operation Epic Fury. This marked the most consequential regional confrontation since the last Gulf War. While tensions between Iran, Israel, and the U.S. have flared periodically for years, this operation represented a meaningful shift in scope and intensity. Iran responded with retaliatory strikes across the region and declared the Strait of Hormuz unsafe for passage, immediately redirecting investor focus toward energy markets, inflation expectations, and broader global risk sentiment.

The most direct market transmission mechanism is oil. Approximately 20% of global petroleum liquids consumption moves through the Strait of Hormuz, making it the world’s most critical energy chokepoint. Iran produces approximately 3 to 3.3 million barrels per day, with nearly all exports transiting the Strait. In the days surrounding the strikes, Brent crude surged from the low $70s to the high $70s per barrel as traders rapidly repriced supply risks, with WTI moving along a similar trajectory. Although Iran signaled an effective closure of the strait, tanker traffic did not halt entirely, thus underscoring the gap between rhetorical escalation and sustained operational disruption. However, rising insurance premiums and heightened military risk can function as a partial supply constraint even without a formal blockade. The U.S. has moved to secure maritime corridors, reflecting the strategic importance of maintaining uninterrupted energy flow. In theory, the U.S. should be relatively insulated from global increases in energy prices stemming from conflict in the Middle East, as the country is largely energy independent. In addition, the U.S. has gradually begun replenishing the Strategic Petroleum Reserve in recent years after it was drawn down to historically low levels during the COVID-era energy market disruptions. However, one of the most powerful drivers of energy prices is consumer expectations about future supply and pricing, which can amplify volatility even when domestic fundamentals appear stable. Media coverage often emphasizes geopolitical risk and potential supply disruptions while giving less attention to the strength of U.S. production or the ongoing rebuilding of the Strategic Petroleum Reserve. At the same time, higher crude prices do not necessarily disadvantage energy producers, as elevated prices can expand margins when consumers ultimately pay more at the pump.

For investors, the central question is duration. A short-lived disruption would likely result in a temporary volatility spike and a contained energy premium. However, a sustained impairment of Hormuz traffic would carry broader macroeconomic consequences, including higher headline inflation, potential delays in central bank easing cycles, margin pressure for energy-intensive industries, and a drag on global growth. Thus far, markets have reflected shock and uncertainty but not systemic panic. Regional sovereign spreads widened and Gulf equity markets declined, yet price action stopped short of crisis-level dislocations, suggesting repricing rather than disorderly liquidation.

Risk sentiment shifted predictably toward defensive positioning. Capital rotated into energy producers, defense contractors, precious metals (gold and silver) and U.S. dollar-denominated assets. Airline and travel-related equities came under pressure as airspace closures across the Middle East disrupted a critical corridor linking Europe and Asia, a route that has become even more important following rerouting caused by the war in Ukraine. Rising jet fuel costs compounded these pressures. The broader equity response, however, has been measured, suggesting that investors are differentiating between direct exposure, second-order energy effects, and longer-term geopolitical risks rather than indiscriminately reducing risk across portfolios.

Additionally, the conflict reinforces a structural theme within defense markets: evolution toward scalable, lower-cost autonomous systems and counter-drone technologies. Established defense contractors such as Lockheed Martin and Raytheon Technologies remain positioned to benefit from sustained procurement cycles. Meanwhile, emerging defense technology firms including Anduril Industries, AeroVironment, and Kratos Defense & Security Solutions reflect the shift toward autonomous platforms and layered countermeasures. For investors, the escalation likely accelerates already rising global defense expenditures and reinforces the long-term case for energy security and advanced military systems.

Ultimately, geopolitical conflict with Iran introduces a renewed risk premium at a time when markets are currently navigating inflation uncertainty, shifting rate expectations, and valuation sensitivity. Energy markets will remain the primary barometer of risk transmission. If disruptions remain tactical and temporary, the macroeconomic spillover may prove manageable. If constraints on energy flow persist, the implications for inflation, policy, and growth could become materially more significant. At present, markets are adjusting rather than panicking, but heightened volatility is likely to remain a feature of the landscape as events continue to unfold.

Looking ahead, markets will remain focused on a series of critical economic releases and policy milestones that could shape sentiment through the spring. The Federal Reserve’s next policy meeting is scheduled for mid-March, where policymakers are widely expected to hold the federal funds rate steady as they continue evaluating inflation and labor market dynamics following the string of rate cuts in late 2025. After March, six regularly scheduled FOMC meetings remain on the 2026 calendar, providing multiple opportunities for adjustments to policy or guidance as incoming data evolve. Markets will also be closely watching how the eventual transition from Chair Powell influences the Federal Reserve’s policy dynamics. In the meantime, investors will weigh not only the decisions themselves but also the forward guidance from Chair Powell and other officials, which remains a key driver of interest rate expectations and yield curve positioning.

Economic data released after February will be equally consequential. Labor market indicators—including the upcoming jobs report—as well as consumer price index updates and producer price readings will help clarify the inflation trajectory and shape expectations for future rate cuts or policy holds. Additional data on GDP revisions, retail sales, and PMI readings will also be critical in assessing the strength of demand and the durability of the economic expansion after the Q4 GDP advance estimate indicated slower growth than in prior quarters.

On the corporate side, the Q4 2025 earnings season delivered solid results overall. Blended year-over-year earnings growth for the S&P 500 came in the mid-teens, around 13% to 14%, while revenue growth approached 8% to 9%—a healthy outcome against a backdrop of elevated investor expectations. A majority of companies reported both earnings and revenue above consensus estimates, with positive surprises broadly across sectors, including Technology and Industrials. Meanwhile, Consumer Discretionary and select defensive sectors lagged. Compared with long-term historical averages, this pace of growth remains strong and reflects ongoing corporate resilience despite tariff headwinds, geopolitical volatility, and cost pressures.

That said, markets are increasingly differentiating between headline growth and forward guidance. While the overall earnings season was constructive, investors remain highly attuned to management commentary on AI spending, margin assumptions, and capital expenditure outlooks, particularly among large technology and software companies. As firms complete their Q4 reporting and begin issuing guidance for 2026, markets will be watching closely to see how executives balance investment in long-term growth initiatives with margin preservation and cash flow generation. Together, the convergence of macroeconmic policy decisions, key economic releases, and corporate earnings guidance sets the stage for a data-rich near-term environment in which volatility could remain elevated. Clearer themes around growth, inflation, and investor risk appetite are likely to continue emerging as markets digest the evolving outlook.

As March marks the close of the first quarter, markets are navigating heightened geopolitical tension and pockets of financial stress. However, the underlying resilience of the U.S. economy and corporate sector remains constructive. Despite volatility tied to developments in the Middle East and growing scrutiny surrounding segments of the private credit market, economic activity and corporate profitability continue to demonstrate durability. Each earnings season provides additional clarity on the productivity gains and long-term profitability associated with AI. Hyperscalers and enterprise software companies have come under increased scrutiny as investors assess the pace and economics of AI adoption. This process ultimately strengthens the investment thesis. Revolutionary technologies inevitably trigger periods of intense evaluation, and the current scrutiny suggests the market is working to properly price opportunity rather than fueling the unchecked speculation often associated with bubbles. At the same time, continued market breadth remains a healthy development. Leadership is gradually expanding beyond mega-cap technology companies and into small- and mid-cap firms that are building specialized AI infrastructure, models, and applications. Many of these emerging innovators assume the early development risk, while larger technology companies retain the financial capacity to scale and integrate these solutions. This positions them as natural acquirers. As a result, merger and acquisition activity across the AI ecosystem could accelerate over the coming quarters, particularly if interest rates continue to trend lower and financing conditions improve.

Energy remains one of the most significant structural constraints in the expansion of AI infrastructure. The rapid growth of data centers and computational demand has intensified pressure on power generation and grid capacity. Increasingly, major technology companies are exploring ways to secure dedicated power generation rather than relying exclusively on local utility grids. Developing new energy infrastructure remains a multi-year process requiring regulatory approval, financing, and construction timelines that can extend close to a decade. However, policymakers have signaled a willingness to reduce permitting obstacles that slow development. AI is increasingly being treated as a national-scale infrastructure investment by companies such as Google and Microsoft. Over time, this could lead large technology firms to participate more directly in utility-scale energy development. Given the strong cash generation of these firms, strategic investments in energy capacity may become an increasingly important component of their long-term operating models.

We continue to identify opportunities within the materials sector, particularly among precious and industrial metals. Prices have risen meaningfully in recent months. However, structural supply constraints and geopolitical competition for critical minerals remain supportive of the longer-term outlook. Countries such as China, which dominate the supply chain for many rare earth and strategic materials, have increasingly restricted exports and accumulated reserves. These actions tighten global supply conditions and may contribute to continued price volatility and upward pressure across key inputs required for energy infrastructure, defense systems, and advanced electronics.

Within fixed income markets, the private credit sector experienced a meaningful test of investor confidence during the most recent redemption cycle. Blackstone’s flagship private credit fund, BCRED, recorded approximately $1.7 billion in net outflows during the first-quarter redemption period after redemption requests reached roughly 7.9% of the fund’s assets. This exceeded the industry’s typical quarterly cap of around 5%. The firm ultimately provided additional liquidity support to ensure investor redemptions were met. Other managers, including Blue Owl Capital, either halted redemptions or sold assets to satisfy withdrawal requests. These actions further amplified investor concerns about liquidity in the sector. Unlike public debt markets, private credit funds generally offer limited transparency regarding the underlying loans and rely more heavily on investor confidence in fund managers. Market veterans such as former Goldman Sachs CEO Lloyd Blankfein, have warned that the combination of leverage, illiquidity, and limited disclosure could amplify stress should investor sentiment deteriorate. Over the past several years, record capital inflows into private credit were driven by higher yields and wider spreads relative to public markets. However, if concerns about AI-driven disruption begin to affect sectors that commonly borrow from private lenders—particularly software and technology companies—investors may reassess the stability of these portfolios. Since many funds employ leverage to enhance returns, even modest losses can become magnified. We have monitored this space closely and reassessed client exposure accordingly. This allowed us to exit certain private credit positions prior to the recent wave of redemption pressure.

Overall, our portfolio positioning continues to emphasize disciplined risk management, diversification, and the identification of forward-looking opportunities. We do not attempt to time short-term market movements. Instead, we evaluate evolving risks and opportunities carefully and make adjustments designed to maintain an appropriate balance between potential return and portfolio stability. Periods of heightened volatility often create opportunities to deploy capital strategically. Maintaining liquidity allows us to take advantage of dislocations and emerging trends as they develop.