Weekly Newsletter: February 16, 2026
The market narrative is changing quickly, from AI being the savior investment for the future to AI taking over the world. Early on, companies got a boost from just saying they were using AI. Yes, there were/are bugs, but it is saving the company money. In Wall Street speak, that means higher profits and a higher stock price. Over the last few weeks, that narrative has been changing to AI will replace huge swaths of employees, and entire industries will be “manned” by AI. Everything from logistics and travel companies to every kind of consultant. The financial industry, which operates with a myriad of spreadsheets, would be replaced. The large number of stocks that might be associated with the potential for AI to run the company were sold last week. Will those dire predictions come true over the next few years as are currently being predicted? Obviously, time will tell, but Wall Street is selling first and asking AI later!
The economic data point to a strong economy that is unlikely to need additional help from lower interest rates. Although the revisions to the number of jobs over the last year were down by 890k, it did not change the unemployment rate. The current month saw a gain of over 130k, more than twice the estimate. Each January, the job numbers get adjusted based on more complete data than when they were initially reported. Historically, those adjustments are not that large but can go in either direction. The monthly revised data have also been negative for the past 18 months. The weekly jobless claims are not as dour as they continue to track historical trends during economic expansions. One other bit in the jobs report, wage growth, continues to outpace inflation. For the past 10 years, with the two-month exception around Covid, wages have outpaced core inflation. The good jobs news did not translate to a good retail sales report, as sales fell during December compared to November. While notoriously volatile, the year-over-year figure of 3% also outpaces inflation, a general indication that the consumer is still spending at a healthy rate, not just paying more for goods. This week, the minutes of the most recent Fed meeting are released, along with an initial look at fourth-quarter economic growth and personal income and spending. Plenty of data coming this week that should inform the Fed about the overall direction of the economy.
The bond market has been moving to its own beat as interest rates took another leg lower last week. Even as the labor market looks good, investors took their cue from the benign inflation report and pushed rates to their lowest level of the year. The volatile stock market is also providing something for bond investors to cheer, for when the going gets tough in stocks, investors go toward the safety of bonds. High-yield spreads, or the difference between treasury yields and low-grade corporate bonds, are widening, albeit from very low levels. Treasuries are also benefiting from a Fed that is beginning to once again expand its balance sheet by buying treasuries in the open market. Mortgage rates have been slowly declining too over the past year, falling about one-half percent in that time.
The rally in everything but technology may be pushing the overall market to levels where it may be tough to get a good return on investment from today’s levels. The most recent update of valuations still has small stocks as the cheapest group, but after the rally in February, it could push them toward at least fair value. Momentum in the major asset classes has been slowly coming down from multi-year highs over the past six months. Within the SP500, the former unbeatable technology sector is being overshadowed by energy, industrials, and basic materials, all showing very overbought conditions. The volatility that the markets have been experiencing since the start of the year is typical in a mid-term election year. The rotation could also see further rotation as investors sort out the recent large declines in technology stocks, looking for those that may be able to weather the AI worries. For now, companies that make tangible “stuff” are faring much better than those that operate from ideas and intangible “stuff”. The rotation in the markets so far this year was a long-time coming. Now that it is here, a further rise could spell danger for more than just technology stocks.
Last week saw the markets largely ignore the economic data and focus on the “maybe” impacts of AI and how quickly it could come to pass. This week, the economy just might take center stage.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.