The latest month was a reminder that markets can rotate aggressively even when the macro backdrop remains intact. Late in February, volatility in AI-linked stocks—amid fallout from advances in Anthropic’s latest model and continued pressure on parts of the software ecosystem—drove headlines and weighed on the Nasdaq. By month-end, the Dow (+0.17%) and Russell 2000 (+0.71%) held up better than the S&P 500 (-0.87%) and Nasdaq (-2.32%) for February. At the same time, most sectors were up sharply and international equities (+5.26% MTD, +11.2% YTD) continued to post meaningful gains, reflecting a broader shift in leadership rather than a wholesale move out of equities.
Geopolitical and policy developments—including the Supreme Court’s tariff decision and rising tensions ahead of the U.S. strike on Iran—generated headlines but produced only limited sustained market disruption—outside of the jump in oil prices. Investors largely treated these events as incremental rather than thesis-altering, keeping the focus on earnings, rates, and the evolving AI competitive landscape.
The AI complex remained central to market psychology, but February also brought a reset in expectations following advances in Anthropic’s latest model. The announcement reinforced how quickly the competitive landscape is evolving and triggered renewed debate around which industries are most at risk from advancements in AI. Software-related companies felt the brunt of the pressure, as investors reassessed margins and long-term competitive positioning in a future where AI agents can easily replicate their products. Nvidia also fell at month’s end, despite exceeding quarterly earnings expectations and announcing an expansion of its inferencing capabilities.
Under the surface, however, participation widened. Value-oriented sectors and small caps attracted flows as investors rebalanced away from concentrated mega-cap exposure. February’s relative strength of an equal-weighted version of the S&P 500 Index (+3.04%) encapsulated the shift, with many sectors up 6% to 12% in February while the Technology sector fell more than 6%; the market was not turning bearish, but it was redistributing risk. That broadening is constructive in our view, as healthier markets tend to see more balanced sector and factor participation.
The economic backdrop continues to support a slow, steady growth narrative. January payrolls surprised to the upside, with job growth accelerating and unemployment at 4.3%, while weekly claims through February remained consistent with a stable labor market. Consumer data were mixed—retail sales softened and confidence surveys reflected some caution—but the overall picture remains one of cooling, not contraction. Labor income growth and still-resilient household balance sheets are consistent with continued, albeit slower, expansion.
Inflation remains above the Fed’s target, even as monthly readings have moderated. January CPI came in slightly softer on the month, but core measures remain firm enough to keep policymakers cautious. The Federal Reserve held rates steady at its late-January meeting (3.50%–3.75%), and February communications signaled a balanced approach—acknowledging cooling inflation while emphasizing that policy easing will depend on sustained progress. Market pricing for two rate cuts has shifted later in the year as a result.
In currencies and commodities, the dollar posted its first monthly gain since October, supported by a less dovish Fed funds rate outlook and periodic safe-haven demand amid geopolitical uncertainty—which helped gold and silver rebound after a sharp late-January selloff.
Our outlook remains constructive but selective. We expect slow, steady growth consistent with a stable labor market and resilient consumer spending. We continue to lean into AI infrastructure and semiconductor exposure, while maintaining diversification across sectors that have benefited from the recent rotation into the broader market.
We continue to favor select international markets where leadership has been strong and fundamentals are improving. Europe’s STOXX 600 has pushed to new highs, supported by industrial and defense-related strength, and European equities have outpaced the S&P 500 over the past year. Italy and Spain stand out, benefiting from improving earnings momentum and tailwinds tied to banks and increased defense spending.
Beyond Europe, South Korea remains one of the strongest global performers (+55.7% YTD), driven by semiconductor demand, AI-related investment, and export momentum—reinforcing the global nature of the AI supply chain beyond the U.S. mega-cap platforms. Vietnam also represents a compelling long-term opportunity, supported by ongoing market development and favorable structural growth dynamics.
February reinforced an important portfolio lesson for 2026: leadership is broadening. Concentration can still drive bursts of performance, but diversified exposure to global growth, industrial capex, and valuation-supported sectors appears increasingly well positioned in the current environment.