February 2026 Financial Market Update: A Fresh Look
The U.S. economy continued to expand at a solid pace last month, supported by steady consumer activity and a resilient services landscape. Housing also regained strength as declining mortgage rates encouraged more buyers to reenter the market.
Still, several headwinds are beginning to weigh on the broader picture. Manufacturing has now declined for ten straight months, and persistent inflation pressures remain a challenge even as price growth gradually cools. At the same time, the Federal Reserve is signaling caution around additional rate cuts, even with rising political calls for more aggressive easing.
Below is a recap of January’s developments, the forces shaping the current landscape, and where we're directing our attention moving forward.
Major U.S. Stock Indices
To kick off 2026, small-cap stocks finally took the lead. After years of trailing the “Magnificent 7,” smaller companies surged ahead, with the Russell 2000 outperforming the S&P 500 and Nasdaq for 14 consecutive trading days. This shift reflects investors turning toward more domestically oriented businesses—many of which are more sensitive to improving credit conditions and local economic trends—rather than relying solely on mega-cap tech leaders.
By the end of the month:
The S&P 500 rose 1.37%.
The Nasdaq 100 added 1.20%.
The Dow Jones Industrial Average led the group with a 1.73% gain.
Economic Snapshot
Entering 2026, the economy maintained positive momentum. GDP for Q3 2025 reached an annualized 4.4%, the strongest reading in two years, and early indicators suggested Q4 growth in the 3–4% range. However, this pace appears to be leveling off. Real-time data shows a narrowing growth profile, driven more by services and government spending than broad-based private-sector demand.
Economists anticipate a gradual return to roughly 2% growth through 2026—steady, though less dynamic. December job gains totaled 50,000, far below last year’s average of 168,000 per month, with retail and manufacturing facing the most pressure. Despite that, the unemployment rate held at 4.4%, pointing to slower—but not collapsing—labor conditions. Wage increases have eased, helping maintain positive real income growth and supporting consumer spending without fueling new price surges. December’s CPI rose 2.7% year over year, nearing the Fed’s target but not quite reaching it. Meanwhile, producer prices saw their largest increase in five months as tariff-related costs filtered through supply chains. The Federal Reserve opted to keep rates unchanged at 3.5–3.75% in late January. Policymakers signaled that only one additional cut is likely in 2026, emphasizing a data-first approach and their intention to remain independent amid intensifying political debates. The ISM manufacturing index posted a tenth month in contraction at 47.9, weighed down by weak demand, reduced inventories, and continued job losses—exacerbated by tariff pressures. In contrast, services continue to expand, housing activity climbed 5% in December as financing costs eased, and credit spreads remain tight. The result: an uneven economy where goods producers struggle while consumers, by and large, hold steady.
Our Outlook
We see the current landscape as one defined by steady but moderating growth, ongoing disinflation, and a Federal Reserve nearing the end of its easing cycle. One encouraging shift is the broadening of market leadership. After several years dominated by large-cap tech, smaller companies and economically sensitive sectors are beginning to reemerge, creating potential opportunities in areas that lagged during the previous rally.
At the same time, this is a mature phase of the economic cycle. Policy uncertainty, geopolitical risks, and shifting growth patterns are likely to generate bouts of volatility. As a result, we are maintaining a balanced approach—participating in cyclical areas while prioritizing quality, being mindful of valuations, and preserving flexibility for future opportunities. In a market like this, prudent risk management can be just as important as pursuing returns.
If you’d like to discuss how these trends may impact your portfolio or have questions about the broader environment, our team is here and ready to help.