February 2026 Financial Market Update (Rewritten Version)

In the early months of 2026, the U.S. economy continued to expand at a pace above its long-term trend, supported largely by steady consumer activity and ongoing strength in service-driven industries. The housing market also regained traction as falling home loan rates encouraged more buyers to re-enter the market.

Still, not everything pointed upward. The manufacturing sector has now declined for ten straight months, and inflation remains uncomfortably high even with recent easing. At the same time, the Federal Reserve is maintaining a measured stance on rate cuts despite increasing political pressure for a more aggressive policy shift.

Below is a look at what happened in January, the underlying forces shaping the numbers, and what we’re watching moving forward.

Major U.S. Stock Indices

In a notable shift, small-cap companies finally captured investor attention at the start of 2026. After years of lagging behind the well-known “Magnificent 7,” smaller firms surged, with the Russell 2000 outperforming the S&P 500 and Nasdaq for 14 consecutive trading days.

This rotation suggests investors are broadening their focus, looking beyond mega-cap technology names and toward companies tied more directly to domestic growth and improving credit conditions.

Here’s how the major indices performed:

• The S&P 500 added 1.37%.
• The Nasdaq 100 rose 1.20%.
• The Dow Jones Industrial Average led the group, climbing 1.73%.

Economic Snapshot

The U.S. entered 2026 with solid momentum. Third-quarter 2025 GDP reached an annualized 4.4%—the highest in two years—while early estimates for Q4 pointed toward growth around 3–4%. Still, evidence suggests the pace may have topped out, with real-time data showing economic gains increasingly tied to services and government spending rather than broad-based private-sector strength.

Most economists expect a cooling toward roughly 2% growth through the year. That’s steady but far from extraordinary.

Labor market data echoed this slowing trend. December payrolls expanded by just 50,000 jobs, a sharp decline from the 2024 monthly average of 168,000. The softness came mainly from retail and manufacturing cuts. Even so, the unemployment rate stayed at 4.4%, indicating a modest easing rather than rapid deterioration.

Wage increases have slowed as well, though they continue to support household purchasing power without adding undue inflation pressure.

Inflation data was mixed. The headline Consumer Price Index rose 2.7% year over year in December, inching closer to but still above the Fed’s target range. A more concerning development came from producer prices, which saw their largest monthly rise in five months as tariff-related expense pressures made their way through the system.

The Federal Reserve kept its benchmark rate unchanged at 3.5–3.75% in late January. Policymakers projected at most a single additional cut for 2026, emphasizing their intention to rely on incoming data and remain insulated from political influence.

The manufacturing backdrop remains challenging. The ISM factory index posted its tenth month of contraction at 47.9, weighed down by sluggish demand, thinning inventories, and job losses amplified by tariff pressures. In contrast, service-related businesses continue to expand, existing home sales climbed 5% in December thanks to lower mortgage rates, and credit spreads remain historically tight.

Together, these forces point to a split economy—one where goods-producing sectors face meaningful obstacles while consumers show resilience.

Our Outlook

The current landscape features moderate growth, declining inflation, and a central bank nearing the end of its easing cycle. One encouraging development: market performance is becoming more diversified. After years dominated by the largest technology companies, smaller and more cyclically sensitive firms are gaining traction, creating openings in areas that previously lagged the broader rally.

Even so, this remains a late-cycle environment. Policy uncertainty and global tensions are likely to create bouts of volatility. Our approach is to balance cyclical opportunities with high-quality holdings, remain disciplined on valuations, and ensure we have flexibility to take advantage of evolving conditions. In markets like this, steering clear of risk can be just as important as selecting the right investments.

If you have questions about your portfolio or recent market shifts, our team is always here to help.