Weekly Newsletter: February 23, 2026
Like a swan or duck cruising a local lake, the grace and ease with which they move about belies the fury beneath the water line. The SP500 may be confused for a duck, essentially unchanged for the year, but hiding the fury in individual stocks. Much of the discussion over the past year has been a desire for the market to “broaden out” or be focused more on the rest of the stocks vs. just the largest within the index. Since Halloween, indices outside of the SP500 have done well, while the SP500 has traded within a 5% range from that close ever since. It would seem that the markets are not worried about a thing when midterm elections are coming up later this year, and a change in the Fed is coming in May. The economy continues to cruise along, almost unnoticed by investors. The GDP report this week was modestly below estimates, but much of that shortfall was due to the government shutdown. While the Fed’s favorite inflation indicator, the personal consumption index (PCE), was a bit higher than expected, personal income rose at a quicker pace. Rumblings are starting to be heard around Wall Street that the Fed just might be on hold for the “foreseeable” future, and their next move might just be a hike if the economy remains strong. February should end economically quietly before the roar of early March takes hold in two weeks.
Reported economic growth during the fourth quarter is merely the first pass of three more revisions in the coming months. Reflecting the government shutdown, growth came in a bit over 1% lower than estimates. However, that is likely to be reversed during the first quarter as the government restarts and the foregone payments are caught up on. The dual mandate for the Fed will get tested at its next meeting in mid-March. The employment picture remains decent, as the unemployment rate and non-farm payrolls were good based on the last report. Inflation data has declined somewhat, but remains stubbornly well above the Fed’s desired level of 2%. One wrinkle in the inflation data is that over the last few years, January has tended to be strong, and ultimately inflation achieves a moderate status by mid-year. There will be another employment and inflation report before the Fed’s meeting, potentially changing the tenor of the meeting. A case is getting built by some Fed watchers that the still resilient economy, employment data, wages, and spending could mean the Fed may be inclined to hike rates rather than cut them later this year.
Interest rates have been declining so far this year, even as the economic data shows strength. A case for further cuts in rates will be tough to make if the inflation data remains strong following the CPI and PCE data in March. It is hard to argue for another cut, as financial conditions are not strained, high yield spreads remain tight to treasuries, and loan activity has picked up within the banking sector. The slowly increasing Fed balance sheet is helping to keep rates down by creating “artificial” demand for treasuries. Disruptions in the bond market and a significant push higher in bond yields could mark overall economic issues that are not evident today.
While the broad averages have been within a tight range over the past few months, individual stocks have been all over the place. Concerns about AI have hurt the technology sector, which during the last year was the beneficiary of AI-related spending. Some of those concerns may be overblown, but investors have not yet been willing to buy the dip as they had in the past. Looking within the SP500, only 20% of the stocks in the index are within +/- 5% of where they started the year. Over 25% of the stocks within the index are up or down more than 20% so far this year. It could be the start of a really good year or a poor year, depending on which stocks dominate a particular portfolio. Small stocks have been doing very well this year, up over 7%, international remains strong, up over 9%, while the previously impervious tech stocks are down 2%. Over the last 6 months, the shift from growth to value has come without an economic event/recession marking that shift. The end of the tech bubble in 2000 marked a shift from growth to value. The financial crisis in 2008 marked the shift from value back to growth. If this shift continues to hold well into late 2026, it could mark the first time of a major style change without an economic event pushing the change.
Nvidia’s earnings mid-week mark the end of earnings season, but will also provide plenty of information on the capital spending related to AI. The economic data will be sparse this week.
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.