February 2026 Financial Market Update: A Fresh Look at the Latest Trends

The U.S. economy carried its strong pace into the start of the year, supported by steady consumer activity and a services sector that continues to be the backbone of growth. Housing also regained traction as falling home loan rates encouraged more buyers to reenter the market.

Still, not everything is pointing upward. Manufacturing has now been in a state of contraction for ten straight months, and inflation pressures remain above the Federal Reserve’s comfort zone even as price growth cools. At the same time, the Fed continues to strike a cautious tone on future rate cuts, despite mounting public and political pressure for faster action.

Below is a closer look at January’s market movements, the forces shaping the current environment, and the areas we're watching next.

Major U.S. Stock Indices

Early 2026 brought long-awaited momentum for small-cap equities. After spending years in the shadows of the well-known mega-cap tech leaders, the Russell 2000 staged a strong comeback. It outpaced both the S&P 500 and Nasdaq for 14 consecutive trading days.

This rotation shows investors growing more comfortable exploring opportunities outside of large tech names. Domestic-focused companies and firms benefiting from improving financing conditions are seeing renewed interest.

Here’s how the major indices performed:

Economic Snapshot

As 2026 began, the U.S. economy showed solid momentum. Q3 2025 Gross Domestic Product (GDP) reached an annualized 4.4%, the highest in two years, while early estimates for Q4 suggested growth between 3–4%. But this pace is unlikely to hold. Recent data indicates growth is becoming more concentrated in services and government spending rather than broad-based demand from the private sector.

Most economists anticipate GDP easing back toward the long-run trend of around 2% as the year progresses—solid, but a downshift from the past year’s peak.

Labor market data for December reflected this cooling. Employers added 50,000 jobs, a sharp decline from the 2024 monthly average of 168,000. Job cuts were most prevalent in manufacturing and retail. The unemployment rate held steady at 4.4%, pointing to a gradual slowdown rather than rapid deterioration. Wage growth also softened, helping keep real incomes in positive territory without contributing to another surge in inflation.

Inflation continues to move closer to the Fed’s target. The headline Consumer Price Index (CPI) rose 2.7% year over year in December. Still, rising producer prices—driven in part by tariff-related costs—signal potential pressure ahead. The Federal Reserve kept rates unchanged at 3.5–3.75% in January and indicated that only one additional rate cut is likely in 2026. Policymakers emphasized their reliance on incoming data and their commitment to independence amid political scrutiny.

While manufacturing remains under strain, services continue to grow, and housing activity surged 5% in December as mortgage rates declined. Credit spreads remain tight, reflecting generally stable financial conditions. The result is a split economic picture—one where consumer-facing sectors remain resilient, while goods-producing industries face more intense pressure.

Our Outlook

The current landscape features moderating growth, ongoing disinflation, and a Federal Reserve nearing the end of its rate-cutting cycle. One encouraging sign is the broadening of market performance. After years of concentration in mega-cap technology stocks, other segments—particularly small caps and economically sensitive companies—are beginning to regain ground.

Even so, this is a late-stage expansion marked by policy uncertainty and geopolitical risks, which may create intermittent volatility. In this environment, we’re maintaining a balanced approach: selectively increasing exposure to cyclical areas while keeping a focus on quality and valuation discipline. Preserving flexibility is also important, as opportunities often emerge during periods of market dislocation.

As always, if you'd like to discuss your portfolio or dive deeper into these developments, our team is here to help anytime.