Equity Indexes Mixed but Mostly Positive in February: The S&P 500 Index fell 0.8% last month, trimming its year-to-date return to 0.7%. Weaknesses were concentrated in segments of the market most exposed to risks associated with the rapid rollout of artificial intelligence (AI). Worries mounted that AI might undermine the profitability of long-established enterprises in a range of industries, including software, online travel, wealth management, commercial property management, and freight logistics.

Smaller companies and international indexes fared comparatively well. The small to mid-capitalization Russell 2500 Index gained 2.5% in February, lifting its year-to-date return to 7.6%. Internationally, the MSCI EAFE Developed Markets Index rose 4.6%, while the MSCI Emerging Markets Index advanced 5.5%. This boosted their year-to-date returns to 10.1% and 14.8%, respectively.

A Good Month for Bonds: Interest rates shifted lower across the U.S. Treasury yield curve in February, providing support to bond markets. Yields on the 2-year and 10-year Treasury notes declined to 3.37% and 3.94%, respectively, from 3.52% and 4.24% at the end of January. Against this backdrop, the Bloomberg U.S. Aggregate Bond Index gained 1.6% for the month, while the U.S. Municipal Bond Index rose 1.2%. Year-to-date returns now stand at 1.7% and 2.2%, respectively.

Mixed January Inflation Reports: The Bureau of Labor Statistics (BLS) reported that January’s Consumer Price Index (CPI) rose 2.4% year-over-year, down from 2.7% in December. Core CPI, which excludes food and energy, eased to 2.5% from 2.6%. Wholesale inflation, as measured by the Producer Price Index (PPI), increased 2.9% in January, slightly below December’s 3.0%. However, Core PPI jumped to 3.6% from 3.3%. Both PPI reports were above Bloomberg median forecasts.

Favorable January Employment Reports: The Bureau of Labor Statistics (BLS) reported that January’s non-farm payrolls increased by 130,000, up from a gain of 48,000 reported in December. The Bloomberg median forecast called for a January increase of just 65,000. The unemployment rate edged down to 4.3% from 4.4%, while wage growth remained steady at 3.7% year-over-year.

Labor Market Steady in February: Initial claims for jobless benefits averaged 216,000 for the first three weeks of February, only slightly above January’s full-month weekly average of 211,000. Continuing claims declined to 1.833 million as of February 14th, from 1.852 million at the start of the month.

Government Shutdown Slowed Fourth Quarter GDP Growth: The Bureau of Economic Analysis (BEA) reported that annualized U.S. gross domestic product growth slowed to 1.4% in the fourth quarter of 2025 from 4.4% in the third quarter. The BEA estimated that the reduction in federal services lowered GDP growth by approximately one percentage point.

Double Digit S&P 500 Earnings Growth: Through the end of February, more than 96% of S&P 500 companies had reported Q4 2025 results. Nearly 75% exceeded analysts’ expectations. Analysts tracked by I/B/E/S estimate the S&P 500’s year-over-year Q4 earnings per share growth was 14.3%, while full-year 2025 growth was 14.6%.

Risk-Off Trade Likely on Monday: On February 28th, the U.S. and Israel launched joint strikes inside Iran, described by President Trump as “major combat operations,” targeting Iranian leadership and military/nuclearrelated capabilities; Iran retaliated with missile strikes toward Israel and against U.S.-linked assets in parts of the Gulf region.

Given the large quantities of petroleum and other products that pass through the Strait of Hormuz, hostilities in this region can trigger a spike in oil and other commodity prices. Absent convincing reassurances that shipping traffic will not be affected, oil prices will likely jump sharply higher this week, global equity markets could experience a strong selloff, and bond prices might climb as investors seek “safe havens.” History suggests that these price moves will prove temporary in nature and that maintaining or increasing portfolio risk exposure, rather than shedding it, is usually the best course of action.

PMI Data on Wednesday: S&P Global is scheduled to release its February U.S. Composite Purchasing Managers’ Index (PMI). As of Friday, the Bloomberg median forecast was 52.3, unchanged from January. PMI readings above 50 indicate expansionary economic conditions.

Employment Data on Friday: The BLS will release February’s change in nonfarm payrolls, the unemployment rate, and wage growth. Bloomberg median forecasts for these measures are 50,000, 4.3%, and 3.7%, respectively.

Longer Term Outlook Remains Positive: The fundamental underpinnings of the financial markets appear solid for 2026. Economists tracked by Bloomberg expect the economy to grow at 2.5%, up from 2.2% last year. Meanwhile, inflation as measured by the Personal Consumption Expenditures (PCE) Core Price Index – the Federal Reserve’s preferred inflation metric – is expected to ease to 2.7% from 2.8%. Analysts estimate S&P 500 EPS growth at just under 15%. If these forecasts materialize, the stock and bond markets should have another good year in 2026.

AI has been a key driver of the stock market’s returns for much of the past three years, but since October of last year it has dragged on performance. This has reflected investor concerns that large technology firms such as Microsoft, Alphabet, and Meta are spending too much on AI capacity and that AI itself will present a threat to the business models of software companies and, more recently, companies in many other industries. These concerns are largely speculative at this point because the deployment of AI remains in its infancy, with its outcomes virtually impossible to predict with any degree of precision. There will undoubtedly be some big AI winners and losers, but the market appears to have become indiscriminate in differentiating between these groups. This is presenting opportunities for active managers to opportunistically reposition their portfolios.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager