February 2026 Financial Market Update: A Fresh Look at the Shifts Shaping the Economy

As we moved through January, the U.S. economy continued to expand at a pace above its long-term trend, supported by steady consumer activity and a still-strong services sector. A softening in mortgage rates helped reinvigorate housing demand, giving the real estate market a welcome lift.

Still, not everything is moving in the right direction. The manufacturing sector has now declined for ten straight months, and persistent inflation continues to complicate the path ahead, even with recent easing. At the same time, the Federal Reserve is signaling caution on rate cuts while facing rising political calls for more decisive action.

Below is a look at what happened in January, what’s driving these conditions, and the areas we are watching most closely.

Major U.S. Stock Indices

Early 2026 brought long-awaited momentum to small‑cap stocks. After years of being overshadowed by the “Magnificent 7,” smaller domestic companies finally took the spotlight. The Russell 2000 beat both the S&P 500 and the Nasdaq for 14 sessions in a row—something investors haven’t seen in decades.

This shift suggests that market participants are broadening their search for opportunity, looking beyond mega‑cap technology companies and toward businesses more tied to everyday economic activity and benefiting from better financing conditions.

Overall market performance:

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

Economic Snapshot

The economy entered 2026 on solid footing. Q3 2025 Gross Domestic Product (GDP) reached an annualized 4.4%—the strongest reading in two years. Estimates for Q4 showed growth between 3% and 4%. Despite this strong run, the data suggests momentum may be easing from here.

Real‑time indicators show growth becoming more narrowly dependent on services and government spending rather than broad-based private activity. Many economists expect the economy to move back toward its long‑term trend of roughly 2% growth through 2026—a sustainable pace, but not a surge.

The labor market is showing signs of gradual cooling as well. December payroll growth totaled just 50,000 jobs, well beneath 2024’s average monthly gain of 168,000. Declines were most prominent in retail and manufacturing. Even so, unemployment steadied at 4.4%, pointing to moderation rather than a rapid slowdown.

Wages have eased from earlier highs but remain sufficient to support positive real income growth. This balance is helping maintain consumer spending without creating renewed upward pressure on inflation.

Inflation itself continues to move in the right direction, albeit unevenly. Headline CPI came in at 2.7% year over year in December. While inching closer to the Fed’s goal, the figure remains slightly above target. A larger concern is the jump in producer prices, which saw their sharpest monthly increase in five months as tariffs pushed input costs higher.

In late January, the Fed kept its policy rate unchanged at 3.5–3.75% and signaled that, at most, one additional cut may occur in 2026. Officials continue to stress data dependency and their commitment to independence, even as political rhetoric escalates.

The manufacturing landscape remains challenging. The ISM index stayed in contraction for the tenth month at 47.9, reflecting weak new orders, shrinking inventories, and ongoing employment losses—pressures made worse by tariff‑related costs. In contrast, service industries remain in expansion mode, housing transactions climbed 5% in December thanks to lower mortgage rates, and credit conditions remain loose by historical standards. The result is a divided economy: struggling goods producers alongside resilient consumers.

Our Outlook

The current backdrop features moderating growth, continued disinflation, and a Federal Reserve nearing the end of its easing cycle. One notable development is the broadening of market leadership. After years of dominance by a handful of giant technology companies, smaller and more cyclical names are beginning to shine, opening up new areas of opportunity.

At the same time, we’re operating in a late‑cycle environment in which policy uncertainty and geopolitical risks are likely to cause intermittent volatility. Our approach focuses on balancing cyclical exposure with high‑quality investments, maintaining disciplined valuations, and keeping flexibility to act when attractive openings arise. In conditions like these, steering clear of potential pitfalls is just as important as identifying winners.

If you have questions or would like to discuss how these developments may affect your portfolio, our team is always here to help.