February delivered rotation, drama, and a useful reminder that not all markets move in the same direction at once.

The AI Trade Gets More Complicated
Nvidia posted a genuine blowout fourth quarter, with revenue up 73% year over year and data center demand still accelerating, yet shares fell more than 5% the day earnings were released.¹ The Magnificent 7 is now down roughly 7% year to date.² It was a clean illustration of where the AI trade stands heading into 2026: fundamentals remain strong, but the market has moved from pricing in potential to demanding proof.

• Disruption anxiety: Mentions of AI disruption on S&P 500 earnings calls nearly doubled from the prior quarter.³ That is encouraging if your company is building the infrastructure. It is considerably less so if your business model might be disrupted by AI. In the market’s crosshairs are software stocks, which have been hit hard over concerns that AI will be easily able to create competing solutions. The stock prices of private credit firms that lend to these software companies likewise pulled back on similar worries.
• The Counterpoint: Fundamental earnings for most software stocks have remained stable. Many firms have reiterated guidance and some companies like Salesforce announced a massive share buyback, indicating that investors may be overestimating the depth and breadth of AI disruption. So too with private credit funds, where the loan books of higher quality lenders appear healthy.
• Belief in future success of AI remains high: Open AI raised $110 billion in their most recent round of funding, bringing the estimated valuation to $840 billion.⁴ This reflects private capital’s seemingly insatiable appetite for AI models. For perspective, at an $840 billion market capitalization, OpenAI would be the 12^th largest company in the S&P 500. OpenAI’s revenue is growing quickly, but the path from revenue to durable, defensible profit remains years away.

Implications for Investors: The AI trade is just starting to evolve. The era of rewarding any company with “AI” in its investor deck is giving way to one that demands evidence of monetization, defensible competitive position, and a credible path to returns on capital. Infrastructure providers with genuine pricing power remain attractive. Owning broad, diversified exposure rather than concentrated bets on any single theme, whether hardware, model providers, or AI-adjacent software, remains the prudent strategy. The winners of the next phase may look quite different from the leaders of the last one.

Tariffs, the Supreme Court, and a Messy Macro Backdrop

February produced the most dramatic tariff development since early 2025 when the Supreme Court ruled 6-3 that the president exceeded the International Emergency Economic Powers Act (IEEPA) authority used to impose broad reciprocal tariffs. Those tariffs had pushed the average effective U.S. tariff rate to roughly 16% at their peak, the highest level since the 1930s. The court struck down President Trump’s use of tariffs under IEEPA.

• The legal response and new tariff authority: President Trump responded by invoking Section 122 of the Trade Act of 1974, a narrower authority that permits tariffs of up to 15% for up to 150 days to address balance-of-payments deficits. A 10% global tariff took effect February 24; the following day the president announced his intention to raise the rate to 15%. Previously negotiated bilateral framework agreements with major trading partners remain in place, for now.
• Tariff Layer Cake: The IEEPA tariffs were the largest single layer, but not the only one. Other tariffs remain intact: 50% on steel and aluminum, 25% on imported automobiles, and 10% on lumber. The U.S.-China truce also remains in effect. The average effective tariff rate fell from roughly 16% at its peak to an estimated 13.7% following the ruling and the Section 122 replacement.^{7, 8}
• GDP and the macro backdrop: Fourth quarter growth came in at 1.4%, well below the 2.8% consensus, partly due to the 43-day government shutdown, which likely reduced GDP by 1-2% according to the Congressional Budget Office (CBO). Consumer spending and business investment were both positive underneath the headline, suggesting underlying momentum remains intact.^{5, 6}
• Inflation and the Fed: January PPI rose 0.5% for the month versus a 0.3% forecast. Core PPI gained 0.8%, more than double expectations. That combination may encourage the Federal Reserve to remain cautious about cutting rates. The next FOMC meeting is March 17 to 18, with updated economic projections to follow. Rate cuts remain possible in 2026, but a re-acceleration in wholesale prices as well as inflationary pressures coming from the new conflict in Iran makes this less certain.^{7, 8}

Implications for Investors: The tariff story has a new chapter but is far from over. The Section 122 tariff expires around mid-July 2026 absent congressional action, creating a near-term policy cliff. New tariff authority is being pursued through additional legal vehicles while companies like Costco who were heavily impacted by the tariffs will seek reimbursement. For investors, diversified geographic exposure remains the sensible hedge. The combination of tariff uncertainty, the evolving situation in Iran and sticky inflation may limit the Fed’s ability to respond if growth weakens.

Trends Worth Noting

• Buybacks hit a record: Corporate America authorized $233 billion in February repurchases, the largest February on record. Salesforce, Walmart, and Verizon led.⁹ Companies buying their own stock at this scale represents sustained, informed demand for equities.
• Small caps outperformed: The Russell 2000 is up roughly 6% year to date while the S&P 500 is essentially flat.¹⁰ Smaller companies draw more revenue domestically and stand to benefit most from any eventual Fed rate cuts.
• International markets led: Developed markets outside the U.S. gained roughly 10% year to date, with the MSCI EAFE logging 14 consecutive weekly gains late in the month.¹¹ Emerging markets added 14%.¹² European earnings momentum and a slight dollar decline both helped.

The Takeaway
Earnings season confirmed healthy fundamentals: roughly 14% year-over-year earnings growth, the fifth consecutive quarter of double-digit expansion.¹³ The underlying economy is slowing from its recent pace but still growing. The rotation toward smaller companies and international stocks validates the case for diversification we have been making for months. Patience and discipline remain the appropriate posture.

RETURN OF MARKET INDICES
Global equity markets (MSCI ACWI) were positive for the month (+1.3%) led by non-U.S. Equities. U.S. large caps were down slightly in February (S&P 500 -0.8%) while U.S. small caps (Russell 2000) were the reverse mirror image, rising by 0.8%. International developed (MSCI EAFE) and emerging market equities (MSCI Emerging Markets Index) were the standouts rising by 4.7% and 5.5%, respectively. Bonds provided quiet ballast as yields drifted lower on slowing growth data, with prices rising 1.6% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 2/28/2026.

Sources

¹ Bloomberg Equity Markets; Nvidia Q4 FY2026 earnings release, February 26, 2026.

² Bloomberg Magnificent 7 Index, year-to-date return as of February 27, 2026.

³ Bloomberg transcript analysis of S&P 500 Q4 2025 earnings calls, February 2026.

⁴ Bloomberg News, OpenAI Series G financing, February 2026.

⁵ U.S. Bureau of Economic Analysis, Advance Estimate of Q4 2025 GDP, released February 20, 2026.

⁶ U.S. Congressional Budget Office, estimate of partial government shutdown impact on Q4 2025 GDP growth, February 2026.

⁷ U.S. Bureau of Labor Statistics, Producer Price Index news release for January 2026, released February 27, 2026.

⁸ Federal Reserve, FOMC meeting calendar. The March 17 to 18, 2026 meeting will include a Summary of Economic Projections (federalreserve.gov).

⁹ Birinyi Associates, U.S. corporate buyback authorization data, February 2026, as reported by Bloomberg. $233.3 billion authorized in February, the largest February on record. Individual company figures from company investor relations announcements: Salesforce $50 billion (February 25, 2026); Walmart $30 billion; Verizon $25 billion.

¹⁰ Russell 2000 Index and S&P 500 Index, year-to-date total returns as of February 27, 2026. FTSE Russell; S&P Dow Jones Indices.

¹¹ MSCI EAFE Index, year-to-date net total return as of February 27, 2026. MSCI Inc.

¹² MSCI Emerging Markets Index, year-to-date net total return as of February 27, 2026. MSCI Inc.

¹³ FactSet Earnings Insight, S&P 500 Q4 2025 earnings season, week of February 27, 2026 (factset.com). Blended earnings growth rate of 14.2% with 96% of S&P 500 companies reporting; fifth consecutive quarter of double-digit earnings growth.

January set a tone for a more cautious investor stance. Much of the U.S. was forced to trudge through snow from recent winter storms and similarly labor markets are trudging slowly along. We remain in a low-hire, low-fire equilibrium. Employers are hesitant to expand, given fiscal uncertainty but are equally loath to let go of trained staff.

While corporate earnings are projected to remain healthy, with an estimated 14% growth for the year, the variables of trade policy and central bank transition create a challenging environment.

After three consecutive cuts to end 2025, the Fed shifted stance to a wait-and-see outlook as the committee voted to hold interest rates steady at the January meeting. The FOMC’s internal debate appears centered on the neutral rate (the level at which policy neither stimulates nor restricts growth) with two of the twelve voters advocating for further cuts to support a slowing manufacturing sector.

A notable development was the nomination of Kevin Warsh to succeed Powell when his term ends in May. During his previous time as a Fed Governor (2006-2011), Warsh was initially supportive of crisis-era liquidity and low rates but opposed the second round of quantitative easing (QE2) in 2011 which he believed would lead to inflation.

Warsh has yet to be confirmed, which could be a challenging  process¹, but understanding his outlook on the Federal Reserve can provide insight to how he might act as Fed Chair.

Warsh In His Own Words

In a November opinion piece in the Wall Street Journal², Warsh outlined his vision:

“Fundamental reform of monetary and regulatory policy would unlock the benefits of AI to all Americans. The economy would be stronger. Living standards would be higher. Inflation would fall further. And the Fed will have contributed to a new golden age.”

Setting aside the utopian prose, his outlook is reflected in four theses, and we examine each in the context of what they mean for investors.

1) “The Fed should discard its forecast of stagflation in the next couple of years”. He believes that ”AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness. Productivity improvements should drive significant increase in real take-home wages.”

Translation: The Fed has been driving by looking in the rear-view mirror (backward looking data that shows a slowing economy and sluggish labor market). Future productivity growth and lower inflation from AI isn’t being factored in, so the Fed is being too conservative.

Implications for Investors:

• Warsh’s logic is that AI productivity gains will manifest rapidly, offsetting the potential inflationary risk of lowering rates prematurely. Advances such as the widespread adoption of PCs and the internet have shown that technology that bolsters workers’ productivity has been a boon for economic growth and corporate earnings and helps to lower inflation.
• We remain optimistic about the benefits of AI but believe that companies (and their investors) that adapt to this technology will see benefits long before the economy. While we agree with Warsh that AI is a rising tide, we believe some boats will rise faster than others.
• If Warsh is less concerned about the potential for inflation, he’s more likely to be willing to lower rates independent of how backward-looking economy data is showing. Lower rates would stimulate the economy and encourage assets like small cap stocks and other speculative investments. This could also provide a tailwind for bond investors

2) “Inflation is a choice.”

Translation: Warsh argues that inflation isn’t the product of an overheated economy but rather the result of too much government spending and expansion of the Fed’s balance sheet. The head of the snake (the Fed) would be eating less of its own tail (buying its own debt).

Implications for Investors:

• Warsh favors shrinking the Fed’s balance sheet, which could manifest in a withdrawal of meaningful government buying of Treasurys.
• We agree that excessive government stimulus during the pandemic contributed to a surge in consumer spending and was a major contributor to inflation. However, the Fed’s balance sheet is used for quantitative easing (QE) programs designed to provide liquidity to markets and influence interest rates beyond short-term rates. Considering the U.S. Dollar is used globally for trade, many foreign banks and financial entities that hold U.S. Dollars need consistent access to U.S. debt markets. In periods of market stress, the Fed has used its balance sheet to support the normal functioning of cash and bond markets.
• While shrinking the Fed’s balance sheet is a laudable financial goal, it may prove difficult if long-term rates crimp consumers or periods of financial stress require Fed intervention.
• If this were to occur, it would likely lead to a steepening of the yield curve, which in turn would lead to higher borrowing costs across the economy (mortgages, corporate bonds, etc.). However, higher borrowing costs would slow the economy. Thus, even if the Fed decided to allow the curve to steepen, at a certain point they would be forced to resume purchases. This dichotomy raises doubt (and speculation) about the degree to which the policy might happen.

3)  “The Fed’s rules and regulations have systematically disadvantaged small and medium-sized banks, which has slowed the flow of credit”.

Translation: Warsh believes that by easing regulatory requirements for smaller lenders, there will be additional availability of credit.

Implications for Investors:

• Improving the availability of credit would help grease the wheels of the U.S. economy by encouraging lending. Smaller banks would have more ability to lend, which could benefit smaller businesses.
• However, the benefits of this could be muted in the context of an environment where credit is available, but at higher rates. For example, a lender might be willing to offer a larger mortgage but at a higher rate of interest.
• This could lead to real estate prices continuing to remain high.

3) “Fed leaders have tried to bind U.S. banks to a complicated, vaunted set of rules in the name of global regulatory convergence.”

Translation:

Warsh argues that the Fed should seek to deregulate U.S. banks and encourage them to de-couple rather than coordinate with their overseas counterparts.

Implications for Investors:

• Deregulation of banks, in general, would likely lead to increased lending and profitability and therefore higher prices on bank stocks.
• Many of the current regulations sprang out of past financial crises and were structured to try to prevent history from repeating. Often a crisis may start locally but have global implications. Notable examples like the 2008 Global Financial Crisis, the Great Depression, the Savings and Loan Crisis of the 1980’s-90’s, etc.
• While excess regulation acts as a speed bump on the road to revenue, a lack of speed limits and guardrails wouldn’t make banks better “drivers”. It would likely result in banks using greater financial leverage, reducing loan quality and potentially repeating some of the errors that led to the Global Financial Crisis.

Capital Markets

Equity markets saw a notable rotation in January as investors grew cautious of the AI theme driving market recent gains amidst higher valuations. Notably this led to a wider breadth of stocks driving market gains including smaller companies (as measured by the Russell 2000).

Official data reported in January remains cloudy due to the late-2025 government shutdown. This data lag created a volatility vacuum where anecdotal evidence and earnings calls carried more weight than usual as earnings were released.

Emerging Market Equities lead the way returning an impressive 8.9% for the month. U.S. Small Caps (Russell 2000) and Developed International Equities (MSCI EAFE) also showed large gains, returning 5.4% and 5.2% respectively. U.S. Large Caps (S&P 500) lagged, returning 1.44% in January. Bonds, as measured by Bloomberg’s U.S. Aggregate index, were nearly flat for another month, eking out a slightly positive 0.11%.

Return of Market Indices

2025 was a year of economic uncertainty and concern, but also of resilience and growth. In this month’s Economic Update, we look back at the issues that dominated our thinking on the economy and financial markets each quarter and then look forward to what we’re focused on in 2026.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 1/31/2026.

¹ Warsh’s journey to become Fed Chair is unlikely to be quick. Post-nomination, the next step toward approval is for vetting to go through the Senate Banking Committee. However, committee member Senator Thom Tillis (R-NC) has indicated he would not on any Fed nominee until the Department of Justice’s investigation of Chair Powell over the Fed’s  headquarters is resolved which he believes is politically motivated Senator Tillis’ term ends in 2026, and he is not seeking re-election, making him less susceptible to political pressure. The Senate Banking Committee is narrowly divided (13 Republicans to 11 Democrats), thus if Tillis refuses to support the nominee, the committee the nomination could stall.

2 Warsh, Kevin The Federal Reserve’s Broken Leadership, Wall Street Journal Opinion 11/16/25

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

2025 was a year of economic uncertainty and concern, but also of resilience and growth. In this month’s Economic Update, we look back at the issues that dominated our thinking on the economy and financial markets each quarter and then look forward to what we’re focused on in 2026.

Q1: Fear of the Unknown
As the Trump administration in Washington found its footing, expectations for global trade reform loomed large. In Q1, our attention was on the impact that tariffs could have on inflation and economic growth, and how the unpredictability of outcomes could spook the financial markets.

A reactionary massive surge in imports contributed to a contraction in GDP of 0.5% in quarter¹. At the same time, inflation remained elevated, leading the Fed to keep its restrictive monetary policy in place. In this uncertain environment, the US stock market struggled for direction as investors feared that recession, or even stagflation, might be on the horizon. By quarter’s end, volatility had returned to the market, and the S&P 500 had lost 4.3%.

In our March update, we reminded investors of the resilience of American institutions and advised them to remain patient, focusing on long-term goals rather than short-term volatility. This advice would serve them especially well in the quarter to come.

Q2: Liberation Day Selloff and Recovery
The second quarter began with the Liberation Day announcement of sweeping tariffs on America’s trading partners. The size and scope of the tariffs caught investors off guard, resulting in a swift selloff across equity markets, including an 11% decline in the S&P 500.

We pointed out that periods of extreme uncertainty may persist for a time, but they are not permanent, and that markets react favorably once a measure of predictability returns.

The announcement of a three-month “pause” in the tariff rollout signaled such a window of predictability. By the end of the quarter, equity markets had recovered, and the S&P was up nearly 6% YTD.

Q3: Shooting the Messenger and Divergence at the Fed
Tariff risk persisted into the third quarter; however, delayed implementation timelines and constructive progress in trade negotiations helped ease market concerns. In Q3, the Bureau of Labor Statistics revised estimates on job growth downward. The reaction was swift: President Trump fired the head of the BLS, the dollar weakened, and equity markets declined. Though the Fed was divided on the pace of rate cuts, the slowing economic data proved enough to convince them to cut rates by 0.25% in September. Equity markets responded favorably, with the S&P 500 rising by a healthy 7.8% in the quarter.

Q4: Closing Time and K-Shaped Data
The fourth quarter began with the shutdown of the Federal government. While every shutdown is unique, we expected the impact on equities to be modest and temporary, and recommended clients stay the course rather than trading on this news. This was indeed sound advice. Despite becoming the longest shutdown on record, the impact on equity markets was mild.

As economic growth took center stage toward year-end, we brought attention to the distinctive nature of the current K-shaped data, which evidenced a bifurcated mix of “winners and losers” in equity markets, higher vs. lower-income households, and other areas of the economy.

The fourth quarter was a victor lap for patient equity investors. The government reopened, and the Fed committed to a “normalization” path with 0.25% rate cuts in October and December.

Looking Ahead: 2026 Rhymes, but will not Repeat

We believe three trends will play out in 2026:

1. Steady Fundamentals. The US economy remains resilient, benefitting from pro-growth fiscal policy, healthy corporate balance sheets, and robust consumer spending, with the anticipated 2026 tax rebate likely to provide a modest incremental boost to household consumption and aggregate demand.
2. (Relative) Rate Stability. We expect monetary policy to normalize with a bias towards slowly lowering rates. Incoming Fed members are likely to be sympathetic to the administration’s preference for lower rates. Compared to the last 6 years, where rates rose from zero to over 5% rapidly and then gradually trickled down, we are entering a period of relative stability. In addition, there is a potential for lower rates regardless of economic trends. Stability and lower rates benefit both companies and investors.
3. Earnings Expansion ². Meaningful earnings growth likely won’t be confined to AI stocks and the Magnificent 7 ³ in 2026. There is a pronounced shift in earnings expectations toward companies beyond the Magnificent 7. While Mag 7 stocks are still expected to deliver strong earnings growth, the change in year-over-year expectations is modest – only +2% higher in 2026 (+22.7% vs. +22.3% for 2025). By contrast, analyst earnings estimates for the other 493 companies are 33% higher for 2026 than in 2025 (+12.5%vs. +9.4%).

The combination of these three trends points toward a favorable backdrop for investors in 2026. However, we continue to recommend a diversified and flexible portfolio philosophy, rather than chasing last year’s “winners” and shunning last year’s “losers.”

No one could have predicted the events of 2025 that we recapped above, but veteran investors know that every new year holds unexpected twists. As we noted many times throughout 2025, the best maxim for long-term investment success is “Patience and Discipline.”

Capital Markets
December was a soft month for US investment returns, while overseas equities saw an appreciable rise. The All-Country World Equity Index (ACWI) rose 1%. Both Developed Non-US equities, as measured by the EAFE and Emerging Market Equities, as measured by the MSCI EM Equity Index, rose by 3%. The S&P 500 finished nearly flat for the second month in a row (+0.1%). Likewise, bonds as measured by Bloomberg’s US Aggregate index were nearly flat, declining by 0.2%. US Small Caps declined 0.6% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 12/31/2025.

 

1 Since GDP is a measure of domestic production, imports represent foreign 2 production and thus are subtracted from the GDP calculation as these are already accounted for in domestic spending.

2 Source: FactSet Earnings Insight 12/19/25

3 The Magnificent 7 currently include Nvidia, Apple, Microsoft, Amazon, Alphabet (Google), Meta (Facebook), and Tesla. While Broadcom replaced Tesla as one of the 7 largest stocks in the S&P 500 by market capitalization, Tesla is still commonly included in the Mag 7 group.

 

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.