February was a reminder that markets never move in a straight line. After January’s momentum carried major indices to new highs, sentiment cooled on a mix of renewed AI concerns, softer labor signals, and a late-month escalation in the Middle East. The good news: market leadership kept broadening.
Market Moves
U.S. large caps slipped -0.76% in February, but the action was in the supporting cast. Mid caps rose 4.12% and small caps gained 2.17%, while U.S. value advanced 2.56% and growth fell -3.34%. Outside the U.S., foreign developed stocks climbed 4.64% and emerging markets surged 5.51%, extending their strong start to 2026 (10.11% and 14.86% year-to-date, respectively).
In fixed income, bonds provided a welcome counterweight. The 10-year Treasury yield ended the month near 3.97%—briefly dipping below 4% for the first time since last November—while the broad bond index gained roughly 1.6%.
Economy Check-In
On the economic front, growth slowed in Q4, but investment stayed strong. Real GDP expanded 1.4% annualized (down from 4.4%), pressured by the shutdown and cooler consumer spending, while business investment rose 3.7% on AI-related buildouts. Full-year 2025 GDP was 2.2%. The labor market was mixed—unemployment was 4.3%, but revised data implies only 181,000 jobs were created in 2025, raising “jobless growth” questions about the quality and durability of the expansion.
AI and the HALO Effect
AI was still the market’s favorite conversation, but February’s tone shifted. Concerns that AI could compress software margins and disrupt business models helped fuel a rotation away from crowded mega-cap tech and toward areas viewed as harder to displace.
Some have labeled these “HALO” companies—heavy assets, low obsolescence—and the idea fits February’s scoreboard: growth lagged while value and more cyclical areas held up better. Valuations still matter, even in the most exciting stories.
Looking Ahead
February’s pullback in U.S. large-cap growth didn’t end the bull story—it broadened the cast. With international stocks, smaller companies, and bonds contributing, diversified portfolios were built for exactly this kind of month. Early March has brought another test as the conflict with Iran has intensified, lifting oil prices and pressuring foreign developed and emerging markets; we’re monitoring developments closely.
