February 2026 Financial Market Update

As we moved through the early weeks of 2026, the U.S. economy continued to stretch beyond trend, supported largely by steady consumer activity and a services sector that refuses to lose momentum. Housing, which had been sluggish for much of last year, picked up again as lower mortgage rates encouraged more buyers to re-enter the market.

Still, not all indicators pointed upward. The manufacturing sector remained under pressure, marking its tenth straight month of contraction , and inflation —though easing—continued to hold above the Federal Reserve’s comfort zone. At the same time, the Fed signaled caution around future rate cuts, even as calls for more aggressive policy moves grew louder in Washington.

Below is a breakdown of January’s key developments, what’s driving the latest market behavior, and the areas we’re watching closely.

Major U.S. Stock Indices

Early 2026 brought long-awaited momentum to small-cap stocks. After years of trailing behind the market’s biggest names—particularly the “Magnificent 7”—smaller domestic companies finally moved into the spotlight. The Russell 2000 outperformed both the S&P 500 and Nasdaq for an impressive 14 consecutive sessions.

This shift suggests investors are broadening their focus, exploring value in companies tied more closely to the U.S. economy—especially those that benefit from improving credit conditions and renewed domestic demand.

Market performance for January included:

Economic Snapshot

The new year began with solid momentum. Third-quarter 2025 Gross Domestic Product (GDP) hit 4.4% on an annualized basis—the strongest reading in two years. Fourth-quarter projections suggested continued strength, with estimates ranging from 3% to 4% growth. Even so, the pace appears to be easing. Real-time economic indicators show expansion increasingly driven by services and government spending rather than broad-based private-sector activity.

Looking ahead, most economists expect growth to settle closer to the long-term trend near 2% as 2026 progresses—not weak, but no longer the surge seen last year.

The December labor report painted a similar picture of gradual cooling. Employers added just 50,000 jobs, far below the 2024 monthly average of 168,000. The declines were concentrated in retail and manufacturing, while unemployment remained steady at 4.4%. Wage growth has slowed to a more sustainable pace, supporting household purchasing power without adding fuel to inflation.

Inflation continued to moderate, with headline CPI rising 2.7% year over year in December. Although this puts inflation within reach of the Federal Reserve’s target, rising input costs—driven in part by tariffs—showed up in the fastest producer-price increase in five months. In its late-January meeting, the Fed held rates steady at 3.5%–3.75% and signaled that only one additional cut is likely this year. Policymakers emphasized their commitment to data-driven decisions, especially amid mounting political scrutiny.

Manufacturing continued to struggle, with the ISM index stuck in contraction territory at 47.9 for the tenth month in a row. Soft new orders, declining inventories, and job losses—amplified by tariff-related pressures—kept the sector under strain. By contrast, services industries maintained expansion, housing transactions jumped 5% in December thanks to lower mortgage rates, and credit markets remained calm, with spreads near historic lows. The result is a divided economy: weakness in goods production alongside steady consumer resilience.

Our Outlook

The current landscape reflects a mix of moderate growth, easing inflation, and a Federal Reserve nearing the end of its rate-cutting cycle. One of the most encouraging developments is the broadening of market participation. After years dominated by mega-cap technology companies, areas such as small caps and economically sensitive sectors are beginning to reassert themselves, opening the door to opportunities beyond the usual market leaders.

At the same time, we remain mindful that this is a late-stage expansion. Policy uncertainty, geopolitical risks, and shifting global trade dynamics are likely to generate waves of volatility. Our approach is to balance cyclical positions with high-quality holdings, stay disciplined around valuations, and maintain flexibility to take advantage of market dislocations. In an environment like this, thoughtful positioning—and avoiding areas with unfavorable risk—remains essential.

If you’d like to discuss your portfolio or explore how these economic trends may affect your strategy, our team is always here to support you.