February 2026 Financial Markets Overview
Tom Francescon

The U.S. economy carried its momentum into the new year, continuing to grow at a pace above its historical trend. Much of this strength came from steady consumer activity and a services sector that remains firmly intact. Housing also regained traction as declining home loan rates encouraged more buyers to re-enter the market.

Still, not everything is moving in the right direction. Factories have now experienced shrinking output for ten straight months, and while inflation has cooled, it remains stubbornly above ideal levels. At the same time, the Federal Reserve continues signaling restraint around future rate cuts, even as political voices push for a faster pivot.

Below is a recap of January’s market performance, the underlying trends shaping the data, and where our attention is focused moving forward.

Major U.S. Stock Indices

Early 2026 delivered a breakout moment for small-cap stocks. After years of trailing behind the market’s largest tech names, smaller companies surged ahead, with the Russell 2000 topping both the S&P 500 and Nasdaq for 14 consecutive sessions.

This shift reflects investors rediscovering opportunities in businesses tied closely to the domestic economy—especially those poised to benefit from improving borrowing conditions.

Here’s how the major indices performed:

Economic Snapshot

The U.S. entered 2026 with impressive economic energy. Third-quarter 2025 GDP reached 4.4% annualized—the highest reading in two years—while early estimates for Q4 pointed toward continued solid growth between 3% and 4%. Even so, the pace appears to be gradually leveling off.

Recent data suggests that while the economy remains healthy, momentum is becoming more concentrated in services and government activity rather than widespread private-sector demand. Many analysts expect growth to settle closer to a typical 2% through the rest of the year.

December’s job numbers underscored this cooling trend, with payrolls increasing by only 50,000—far below 2024’s average monthly gains. Losses were particularly notable in manufacturing and retail. However, unemployment held steady at 4.4%, pointing to a labor market that is slowing, not deteriorating.

Wage gains have eased but continue to outpace inflation, helping sustain consumer spending power. Meanwhile, the Consumer Price Index rose 2.7% year over year in December, inching closer to the Federal Reserve’s target but not quite achieving it. Producer prices accelerated, driven by tariff-related increases in input costs.

At its late-January meeting, the Fed kept policy rates unchanged at 3.5%–3.75% and indicated that only one additional rate cut is likely in 2026. Officials underscored their intention to maintain a data-driven stance despite mounting political scrutiny.

Manufacturing remained in contraction territory for the tenth month at an ISM reading of 47.9, with soft demand and tariff pressures weighing heavily on producers. In contrast, services continue to expand, housing transactions climbed 5% in December as declining mortgage rates improved affordability, and credit spreads remain historically narrow—creating a clear divergence between weaker goods-producing sectors and strong consumer-driven activity.

Our Outlook

The current backdrop reflects moderate economic growth, ongoing easing of inflation pressures, and a Federal Reserve nearing the end of its policy normalization. One encouraging theme is the widening of market participation. After several years dominated by mega-cap technology names, smaller companies and cyclical sectors are beginning to re-emerge, presenting fresh opportunities in parts of the market that were previously overlooked.

Still, we believe this phase of the cycle calls for balance and caution. The expansion is mature, and unpredictable policy developments or geopolitical risks could spark bouts of volatility. Our approach continues to emphasize quality companies, thoughtful exposure to economically sensitive sectors, and disciplined valuation assessments. Preserving flexibility remains essential, as avoiding pitfalls can be just as important as identifying winners.

If you have questions about your portfolio or these market updates, our team is always here to help.