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U.S. military actions in Venezuela and Iran drew surprisingly muted market reactions, though oil prices spiked, signaling potential volatility as geopolitical risks evolve.
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The S&P 500 declined modestly in February, driven by weakness in big tech, while smaller stocks, value stocks, Utilities, and Energy posted strong gains.
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Investors gravitated toward heavy-asset, low-obsolescence companies, betting they are less vulnerable to disruption from artificial intelligence.
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Growing cracks in private credit exposed rising defaults and liquidity risks.
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Economic data point to modest growth, sticky inflation, and a soft labor market amid rising geopolitical risks.
Headlines over the past month have been dominated by U.S. military actions, first in Venezuela and more recently, Iran. In our first commentary of 2026, we noted the muted market response to the unveiling of unilateral action in Venezuela. The initial reaction to the much broader attacks on Iran was similar, although the price of oil spiked immediately. This unexpected indifference to a major geopolitical shock will likely shift as the war triggers almost inevitable unintended or unforeseen consequences. Investors should prepare for a more volatile market ahead.
Behind the headlines were plenty of issues for investors to ponder. The S&P 500 Index fell fractionally in February, returning -0.8%. This return largely reflected the slide in big tech as the Tech sector dipped -3.9%, even while many smaller stocks flourished. The equal-weighted S&P 500 advanced 3.5%. Value stocks outperformed growth stocks across the capitalization range, a trend that is generally favorable to our investment discipline. Much of the action centered on the projected impact of AI, with worries on that account sending software stocks downward while rising electrical needs for data centers pushed the normally placid Utilities sector up 10.2%, while Energy rose 9.4%. The February dip in Consumer Discretionary stocks (sector down -5.3%) reflects a spending retreat, which might accelerate over worries around the Mideast war.
The AI effect was evident across the market, even where it might be least expected. Investors pumped up the valuation of companies that came under a new acronym, “HALO,” which stands for “heavy assets, low obsolescence.” These companies found new attraction for appearing unlikely to be disrupted by artificial intelligence. Meanwhile, we watched with interest the rising trend of companies employing the large AI engines on top of existing software to increase efficiency. We, too, are exploring how the adoption of powerful AI could expand and accelerate the analytics and assessments we routinely employ.
Another investing concern gained traction in February as more cracks appeared in private credit. This has been a fast-growing, largely unregulated source of funding for privately held companies and other enterprises. The emerging problems, including rising defaults, have exposed the vulnerabilities of investments in hard-hit software companies as well as creative financing, which may have been disguising losses. Investors are discovering the potential liability of these often illiquid investments, highlighting our historic unwillingness to allocate to an asset class we assess as more risk than reward. The strong fixed income returns realized by our clients in 2025 in higher-quality bonds only confirm our prejudice.
The latest economic indicators suggest a modestly expanding economy, somewhat sticky inflation, and a sluggish labor market. Rising oil prices act like a tax increase, which may balance the stimulus expected from expanded tax refunds arriving in March and April.