ECONOMIC AND FINANCIAL MARKET UPDATE - FEBRUARY 2026
- Feb 26
- 8 min read
Recent Market News
The first weeks of 2026 have been characterized by continued broadening and sector rotation in equity markets. Thus far, mid-cap, small-cap, and foreign markets are outperforming the S&P 500, as the index has been weighed down by lackluster performance from the highly concentrated Magnificent-7. Valuations for the Mag-7, which comprise nearly 30% of the market capitalization of the overall S&P 500, have fallen from a forward P/E of nearly 32.0 one year ago to 25.8 as of February 17, while the P/E of the S&P’s remaining 493 has remained stable around 20 over the same period, supported by robust corporate earnings. We expect investors will continue to diversify into markets with more attractive multiples in the coming months.
Artificial intelligence remains a key theme in equity markets but has not universally benefited all sectors in recent weeks. Semiconductor, memory, and infrastructure companies continue to benefit from seemingly insatiable demand, while software and financials companies sold off on fears of AI related business model disruption. Hyperscalers are once again drawing scrutiny from investors due to heightened capital expenditure forecasts impacting margins and profitability in the near term. Meanwhile, defensive sectors such as energy, materials, industrials, and consumer staples have outperformed the overall index, highlighting the market rotation toward value (19.2 forward P/E) vs growth (24.6 forward P/E).1 Despite this intra-sector volatility, the S&P 500 closed up 1.11% for the year as of February 20, less than 2% from its all-time high.
Though markets have remained broadly resilient, geopolitical uncertainty remains at the forefront of the investor psyche. Recent headlines have highlighted a series of geopolitical events, including U.S. intervention in Venezuela, tariff threats aimed at NATO allies over U.S. interests in Greenland, potential U.S. strikes in Iran, and recently the 6-3 Supreme Court ruling on the legality of President Trump’s global tariff policies. The court ruled against the imposition of tariffs on the basis of the International Emergency Economic Powers Act, however, ambiguity remains. Sections of the Trade Act of 1974 (allowing up to 15% tariffs for 150 days, then requiring congressional renewal) and the Tariff Act of 1930 (allowing 50% tariffs on countries which discriminate against U.S. commerce) may offer alternative routes for the Trump administration to impose the majority of the existing tariffs. Additionally, it is currently unclear if, or how, refunds on collected levies paid will occur.2 Stay tuned.
Inflation
The consumer price index increased +0.2% m/m and +2.4% y/y in January, softer than expectations of +0.3% and +2.5%, respectively. Core CPI – a less volatile figure which strips out food and energy prices – was in-line with expectations at +0.3% m/m and +2.5% y/y. Much of the easing in January’s reading was due to relief in the energy sector, with ‘gasoline’ down -7.5% y/y and ‘fuel oil’ down -4.2% y/y. Though the rate of inflation as measured by the CPI remains above the Fed’s 2% target, significant progress has been made in achieving a soft landing, i.e., the curbing of inflation via the tightening of monetary policy without causing a recession.
In further dissecting the headline figures, there are a few dynamics we believe are worth noting. The chart below at left displays the annualized rates of inflation for the goods and services categories within headline consumer price index. The index for goods, which spiked to uncharacteristic levels throughout the pandemic era due to supply chain disruptions and significant monetary stimulus, quickly normalized below 2.0% in the post-pandemic era and, at times, has been deflationary in recent years. Notably, the widely-feared inflationary impact on goods due to tariffs is yet to be realized, however, we continue to closely monitor trends in producer pricing and consumer spending. The index for services continues to trend downward but remains above the 2.0% target and accounts for the majority of the increase in headline CPI. Further, the index for ‘shelter’ remains the largest contributor to services inflation and accounts for 30-40% of the increase in headline CPI. Excluding the outsized impact of the shelter component, headline CPI has been near or below 2.0% since June of 2023, as displayed by the chart below at right.3
Payrolls and Unemployment
For January 2026, the U.S. economy added +130k jobs – twice as strong as estimates of +70k – marking the strongest result since December 2024. Meanwhile, the unemployment rate declined to 4.3%, better than expectations of 4.4%, and well-within the threshold of full employment. Job gains were led by ‘health care’ (+82k), ‘social assistance’ (+42k), and ‘construction’ (+33k), while losses occurred in ‘federal government’ (-34k) and ‘financial activities’ (-22k). Employment showed little change over the month in all other major industries.4
While this indicates a strong start to 2026, total nonfarm employment growth for 2025 was revised down to +181k from +584k, implying average monthly job gains of only +15k, well below +49k as previously reported. This benchmark revision was expected and was largely due to changes in the statistical ‘birth-death’ model, which was previously based exclusively on historical data. The Bureau of Labor Statistics only surveys existing employers and has difficulty estimating business creation and closing. As a result, payrolls estimates have been subject to ongoing and relatively large birth-death forecasting errors since 2020 due to a significant increase and subsequent normalization of business creation in the post-pandemic period. These changes to the birth-death model will now incorporate current sample information each month, which should help to better reflect current labor market conditions and reduce the magnitude of future revisions.5
Economic Growth
Real gross domestic product increased at an annual rate of 1.4% m/m in Q4, below expectations of 1.9%. Growth in the fourth quarter was primarily driven by increases in consumer spending and investment, which were partially offset by a 16.6% decline in government spending due to October’s record 43-day government shutdown.6
The Bureau of Economic Analysis estimated that this reduction in government spending subtracted 1.2% from real GDP growth for the fourth quarter. Despite this softer-than-expected Q4 result, annualized GDP for 2025 was 2.2% y/y, better than estimates of 2.0% but lighter than 2.4% growth in 2024.7 We expect a stronger Q1 result on the resumption of government spending and steady growth in the coming year driven by continued capital investment in AI and manufacturing, as well as consistent wage growth and stimulative effects from last year’s tax reform.
As of February 20, the Atlanta Fed GDPNow model initial estimate for the first quarter of 2026 is 3.13%, supported by improvement in consumer spending, non-residential investment, private inventories, and government spending. The ‘Blue Chip’ institutional consensus has broadened moderately but remains positive with the average near 2.0%. The next model update will occur on February 24.
GDPNow is not an official forecast of the Atlanta Fed, rather, it provides a running estimate of real GDP growth based on currently-available data for the current measured quarter utilizing a similar methodology to that of the Bureau of Economic Analysis.8
Manufacturing Data
The Institute for Supply Management Manufacturing PMI – a key early indicator of business conditions – rose to 52.6% in January, higher than expectations of 48.9%, indicating that the U.S. manufacturing sector returned to expansionary territory for the first time in twelve months. Overall improvement was primarily driven by a 9.7% increase in the New Orders Index to 57.1% from 47.4% in December. Also notable are the improvements in the Production Index (55.9%) and the Backlog of Orders Index (51.6%), which returned to expansionary territory and are now at their highest levels since February 2022 and August 2022, respectively.
Five of the six largest manufacturing sectors (Transportation Equipment; Machinery; Chemical Products; Food, Beverage, and Tobacco Products; and Computer and Electronic Products) expanded in January, while Petroleum and Coal Products declined. The indexes for Employment (48.1%) and Inventories (47.6%) remain in contraction but improved from December’s reading.9
Our Thoughts
We maintain a constructive outlook with respect to the economy and financial markets and believe the current macro environment should continue to provide support for equities. Moderating inflation, stability in labor markets, and consistent economic growth in the U.S. suggest a strong foundation to the U.S. economy. Though the rate of easing may be inconsistent, we expect additional cuts to the federal funds rate throughout the year. Easing short-term interest rates are generally positive for equity markets as they provide relief to both companies and the consumer. Lower rates reduce borrowing costs, which improves margins and earnings for corporations, and drives consumer demand. Corporate profit growth – currently forecasted at approximately +14% for 2026 – should offer investors confidence in a fourth consecutive year of price appreciation, despite elevated valuations. As market dynamics shift, extrapolating short-term trends presents inherent risk. We anticipate increased volatility and additional broadening in equity markets as the dollar remains weak, investors continue to diversify away from overconcentration risk, and geopolitical risks evolve. An uncertain path to peace in Ukraine and Russia, increased tensions between Taiwan and China, and instability in Iran could negatively impact energy prices. We continue to closely monitor these issues as they pertain to the U.S. consumer.
Ongoing rebalancing and further diversification will continue to be our priority to mitigate risk and preserve capital. Within the equity portfolio, we remain focused on companies which we believe exhibit strong fundamentals and will continue to take advantage of volatility as it arises, while balancing risk with high-quality short-term fixed income assets. As always, we believe patience, discipline, and maintaining a long-term perspective are of critical importance to achieving superior long-term absolute positive and relative rates of return. We highly value your relationship and thank you for your confidence that you place in us. We look forward to speaking and meeting with you throughout the year.
Sources
Disclosures
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Parkview Partners Capital Management are separate entities from LPL Financial.
The information contained herein has been obtained from sources known to be reliable. However, no guarantee, representation, or warranty, express or implied, is made as to its accuracy, completeness, or correctness.
There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification and asset allocation do not protect against market risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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