February 2026 Financial Market Update – Rewritten Version
Chad Mangum

The start of 2026 brought a mix of encouraging economic signals and emerging areas of concern across the U.S. landscape. Consumers continued to power overall activity, and services industries remained steady, helping the economy maintain an above‑trend pace. Housing also regained momentum as lower home loan rates encouraged more buyers to re-enter the market.

Still, not everything is moving in the right direction. Factory output has now declined for ten straight months, and inflation, while easing, remains stubbornly elevated. At the same time, the Federal Reserve is signaling a careful approach toward rate reductions despite mounting political pressure to loosen policy more aggressively.

Below is a look at what happened in January, what’s driving the latest trends, and the developments we’re paying close attention to moving forward.

Major U.S. Stock Indices

Early 2026 brought a notable shift in market leadership. Smaller companies—long overshadowed by the biggest names in tech—finally saw renewed enthusiasm from investors. The Russell 2000 outpaced both the S&P 500 and the Nasdaq for 14 sessions in a row, marking a significant stretch of outperformance.

This movement suggests investors are branching out beyond mega‑cap technology and seeking opportunities in companies that are more tied to the domestic economy—particularly those poised to benefit from improved financing conditions.

Here’s how the major indexes performed in January:

Economic Snapshot

The economy entered the new year on solid footing. Gross Domestic Product (GDP) for the third quarter of 2025 reached an annualized 4.4%, the strongest pace in two years. Early tracking for the final quarter of 2025 suggested growth in the 3–4% range. However, many signs indicate the peak has likely passed.

Recent data shows that growth is becoming narrower, with more reliance on services and government activity rather than a broad base of private‑sector strength. Many economists expect growth to settle toward a more typical 2% rate throughout 2026—steady and sustainable, but not exceptional.

Hiring slowed in December, with payrolls increasing by only 50,000 compared to the 168,000 monthly average seen in 2024. Weakness was most pronounced in retail and manufacturing. The unemployment rate held at 4.4%, pointing to a gradually cooling labor market rather than an abrupt downturn.

Wage increases have eased, which helps keep real incomes in positive territory. This balance supports consumer demand without giving fresh fuel to inflation. Speaking of inflation, the Consumer Price Index (CPI) rose 2.7% year over year in December—close to the Fed’s target but not quite there. Meanwhile, producer prices saw their fastest monthly increase in five months as tariff‑related costs made their way through supply chains.

The Federal Reserve kept interest rates unchanged at 3.5–3.75% in late January and signaled that only one more cut is likely this year. Central bankers stressed that decisions will remain data-driven, even as political voices push for faster easing.

Manufacturing activity remains weak. The ISM index registered a tenth consecutive month in contraction at 47.9, reflecting soft demand, declining inventories, and job losses intensified by tariffs. On the other hand, service industries continue to grow. Home sales improved sharply in December, rising 5% as mortgage rates declined. Credit spreads remain historically tight, highlighting a split economy where consumer‑facing sectors hold firm while goods producers face headwinds.

Our Outlook

We’re operating in a period defined by moderating growth, continued disinflation, and a Federal Reserve nearing the end of its current easing cycle. One important development: market leadership is expanding. After years dominated by a handful of large tech firms, small‑cap and cyclical sectors are beginning to reassert themselves, offering fresh areas of potential opportunity.

Even so, this stage of the business cycle tends to come with higher uncertainty. Policy shifts, geopolitical risks, and market sentiment could all contribute to bouts of volatility. In this environment, we remain focused on balancing cyclical exposure with strong fundamentals, keeping valuations in check, and retaining flexibility to take advantage of new openings.

As always, if you’d like to discuss your portfolio or any of these developments, our team is here and ready to help.