February 2026 Financial Market Update (Rewritten Version)

As we moved through the start of 2026, the U.S. economy continued to expand at a pace above its long-term trend, supported largely by steady consumer spending and ongoing strength in service-related industries. The housing market also regained traction, thanks in part to easing mortgage rates that helped bring more prospective buyers back into the market.

Still, not all indicators are moving in the same direction. Industrial production remains under pressure, with manufacturing activity contracting for the tenth month in a row. At the same time, stubborn inflation—though moderating—continues to complicate the policy outlook. The Federal Reserve has indicated that it intends to move cautiously on further rate cuts, even as political leaders push for faster action.

Below is a look at the key developments from January, what’s driving market sentiment, and the areas we’re watching closely.

Major U.S. Stock Indices

The beginning of 2026 offered a rare bright spot for small-cap stocks. After years of trailing the large-cap tech giants often grouped as the “Magnificent 7,” smaller companies staged a notable comeback. The Russell 2000 even outpaced the S&P 500 and Nasdaq for an impressive 14 consecutive trading days.

This shift suggests investors are broadening their focus beyond mega-cap tech and toward businesses with stronger ties to the domestic economy, as well as those poised to benefit from improved lending conditions.

Here’s how the major indices performed:

  • The S&P 500 rose 1.37%.
  • The Nasdaq 100 advanced 1.20%.
  • The Dow Jones Industrial Average led with a gain of 1.73%.

Economic Snapshot

The U.S. entered the new year with meaningful momentum. Third-quarter 2025 GDP reached an annualized 4.4%, the strongest reading in two years, while estimates for Q4 suggested continued growth in the 3–4% range. Even so, the economy appears to be settling into a slower but still steady pace. High-frequency indicators reflect narrowing growth that leans more heavily on services and government spending than on widespread private-sector demand.

Most economists expect GDP to trend back toward a 2% growth rate through the rest of 2026—healthy by historical standards, though more modest than last year’s pace.

Labor market data also point to some cooling. December payrolls increased by just 50,000, significantly below 2024’s average monthly gain of 168,000. Job losses were most prominent in retail and manufacturing. Even so, the unemployment rate held steady at 4.4%, suggesting a gradual slowdown rather than a sharp downturn. Wage growth has eased, but real incomes remain positive, helping sustain household spending without re-accelerating inflation.

The Consumer Price Index grew 2.7% year over year in December—close to, but still above, the Federal Reserve’s target range. The more concerning development came from producer prices, which posted their largest increase in five months as tariff-related costs moved through the supply chain.

At its late-January meeting, the Fed kept rates unchanged at 3.5–3.75% and signaled that only one additional cut is likely in 2026. Policymakers emphasized their commitment to data-driven decision-making and maintained a firm stance on independence amid rising political tension.

Manufacturing remained in contraction for the tenth straight month, with the ISM index landing at 47.9. Soft orders, falling inventories, and ongoing job losses—exacerbated by trade-related pressures—continue to weigh on producers. In contrast, service industries are still expanding, housing sales climbed 5% in December as mortgage rates declined, and credit spreads remain historically tight. The result is a split economy: goods-sector weakness alongside resilient consumers.

Our Outlook

The current backdrop is shaped by moderating growth, cooling inflation, and a Federal Reserve nearing the end of its rate-cutting cycle. Notably, market leadership appears to be widening. After several years dominated by mega-cap technology stocks, areas like small caps and economically sensitive sectors are beginning to participate more meaningfully.

Still, this is a late-stage expansion environment. Policy uncertainty and geopolitical shifts may generate bouts of volatility. Our approach remains balanced—leaning into cyclical opportunities where appropriate, maintaining a focus on quality, and being disciplined about valuations. In conditions like these, avoiding overexposure is often just as important as choosing what to hold.

If you have questions about your portfolio or would like to discuss any of these developments, our team is always here to help.