February 2026 Financial Market Update – A Fresh Perspective

The U.S. economy carried its momentum into the start of the year, continuing a growth pace that exceeded long‑term trends. Strong household spending and a steady services sector remained the main drivers. At the same time, the housing market picked up again as lower mortgage rates encouraged more buyers to reenter the market.

Still, not everything is pointing upward. The manufacturing sector has now contracted for ten straight months. Meanwhile, although price pressures have cooled somewhat, inflation remains above the Federal Reserve’s comfort zone. The Fed, under increasing political scrutiny, continues to signal a cautious stance on rate cuts.

Below is a recap of what shaped markets in January, the forces behind the recent data, and the areas we’re monitoring.

Major U.S. Stock Indices

Early 2026 brought a resurgence for small‑cap stocks. After years of trailing the market’s largest technology names, smaller companies finally took center stage. The Russell 2000 beat out both the S&P 500 and Nasdaq for 14 consecutive trading days.

This shift shows investors are expanding beyond mega‑cap leaders in search of opportunities among domestically focused businesses that may benefit from better borrowing conditions and Main Street activity.

In summary:

• The S&P 500 advanced 1.37%.
• The Nasdaq 100 added 1.20%.
• The Dow Jones Industrial Average rose 1.73%.

Economic Snapshot

The economy entered 2026 on solid footing. Third‑quarter Gross Domestic Product (GDP) reached a 4.4% annualized pace—the strongest reading in two years. Early estimates for the fourth quarter suggested growth in the 3–4% range. That said, the peak appears to be behind us. Higher‑frequency indicators point to slower momentum, with growth increasingly driven by services spending and government activity rather than broad-based private demand.

Economists anticipate a return to roughly 2% trend growth throughout 2026—steady and sustainable, but far from rapid expansion.

December payrolls increased by 50,000, notably weaker than the 2024 monthly average of 168,000. Job cuts were concentrated in retail and manufacturing. The unemployment rate held steady at 4.4%, a sign of gradual cooling rather than a sharp downturn. Wage gains have decelerated, allowing income growth to remain positive without adding fresh inflationary pressure.

Headline Consumer Price Index (CPI) inflation landed at 2.7% year over year in December—moving closer to the Fed’s target but not fully aligned. A point of concern: producer prices posted their largest monthly increase in five months as tariff‑driven costs continued flowing through supply chains.

In late January, the Fed kept interest rates unchanged at 3.5–3.75%. Policymakers suggested that only one additional cut is likely in 2026, reiterating their commitment to data‑driven decisions and maintaining independence amid rising political pressure.

The Institute for Supply Management’s manufacturing index recorded a tenth straight contraction at 47.9. Persistent weakness in new orders, lower inventories, and job losses—exacerbated by tariff effects—continue to weigh on producers. By contrast, the services sector remains in expansion territory. Housing activity strengthened with a 5% rise in December sales thanks to lower borrowing costs, and credit spreads remain near historic lows. The result: a split economy where goods‑related industries face headwinds while consumer‑oriented sectors continue to hold up.

Our Outlook

We see the current backdrop as one defined by moderating growth, easing inflation, and a Federal Reserve nearing the end of its rate‑cut cycle. One encouraging development is that market participation is widening. After years of concentration in large-cap tech, investors are rediscovering opportunities in small caps and economically sensitive sectors.

Still, this is a late‑cycle environment where geopolitical risks and policy uncertainty may lead to periodic market swings. Our approach remains measured: balancing exposure to cyclical areas with high‑quality holdings, maintaining discipline on valuations, and keeping capital ready for attractive openings. In markets like this, steering clear of potential pitfalls is just as critical as choosing what to own.

If you have questions about your portfolio or would like to discuss these market trends further, our team is always here to help.