Grimes, featuring HANA
We Appreciate the Power

And if you long to never die/
Baby, plug in, upload your mind/
Come on, you’re not even alive/
If you’re not backed up on a drive

For a short month, February sure had a lot happen during its 28 days. Investors started the month assessing the impact of the selection of Kevin Warsh as the next Fed Chair and ended the month with news of U.S. and Israeli military action against Iran. In between, there was the Supreme Court decision that invalidated the Trump administration’s tariffs program, though this may be temporary.

Additional economic data showed that inflation was proving to be difficult to bring down, with tariff effects being passed on to consumers, while at the same time, Q4 GDP readings were below forecasts. These data points highlight the challenge the U.S. Fed faces. If it is necessary to fight rising unemployment, can it stimulate economic growth without increasing inflation? Overseas, geopolitical, and economic developments were supportive of future growth, with Germany announcing significant stimulus programs and Japanese election results signaled more economic growth initiatives.

While each of these had some impact on February’s investment results, what was more impactful was the ongoing debate of whether the aggressive expansion of AI-related technologies will be beneficial or harmful to the U.S. economy, U.S. labor markets, and corporate business models. Unfortunately, the answers are likely mixed and will take years to decades to fully play out. The latest market shifts started in Q4 2025 with investors looking beyond the Mag 7 stocks for new ideas and diversification amidst early concerns about a top-heavy market. This trend took off with enhanced vigor in 2026.

Since the start of the year, sectors and stocks that are thought to have less exposure to the negative effects of AI-related technologies have outperformed many of the biggest AI-linked stocks. Since every market trend needs an acronym, the latest is HALO – Heavy Asset Low Obsolescence companies. These include many energy, industrial, and materials companies that may benefit from the AI trends but are more insulated from the negative effects. Contrast this with companies whose businesses and products are viewed to be at risk of being replaced by AI-based technologies. These include software businesses with proprietary products that could be replicated with AI-generated code. The market reaction was swift and harsh in some cases and likely overplayed for the moment.

February’s results largely mirror what occurred in January. Larger, mega-cap growth stocks trailed smaller-cap value-oriented stocks. Utilities, Energy, and Materials were the top sectors in the S&P 500, benefiting from greater exposure to HALO-type companies. Overseas stocks continued their strong outperformance relative to the U.S. as MSCI EAFE returned 4.6% while the S&P was down -0.8% for the month. Bond markets benefitted from a slow decline in U.S. Treasury yields during the month, with the U.S. 10 Yr yield briefly falling below 4% at month end. Oil prices rose in late February as fears rose of a new Middle East conflict. Gold prices continued to climb on fear and inflation hedging, while silver prices declined for much of the month.

Here are observations on what occurred across the investment markets in February:

Broad Market Performance¹

Domestic Equity²

• U.S. equity market returns were mixed. Concerns about the impact of AI based innovation weighed on segments while others appeared more insulated from its impact.

• Value stocks once again outperformed growth across market caps. Mid-cap stocks were the best performing segment for the month. Market breadth improved, measured by the 4.5% outperformance of the equal vs. cap weighted S&P 500.

International and Global Equities³

• Non-U.S developed market stocks performed well, adding to the recent outperformance relative to the U.S. Japanese stocks, the largest single country in the index, were among the best performers.

• Emerging market stocks remain on a tear, up close to 15% YTD despite China being down -1.3%. Korea and Taiwan, reflecting their technology manufacturing strength, are driving index performance.

Fixed Income Markets⁴

• U.S. bond market returns benefitted from the decline in U.S. interest rates and good Q4 corporate earnings reports.

Specialty Markets⁵

• Oil prices rose on potential supply disruption concerns while natural gas prices fell over the month. Gold prices rose while silver prices declined.

Sectors⁶

• 7 of 11 sectors were positive in the month, led by Utilities (10%), Energy (9%), and Materials (8%). Consumer Discretionary (-5%) and Communication Services (-5%) were the laggards.

Innovation is one of the key components of a successful economy, as it spurs growth, redistributes and redirects capital flows into more productive businesses, and leads to more development across industries and business models It does bring change which can be good for some and destructive to others. Many compare the new AI era to the dawn of the internet age which spurred decades of growth and innovation, but not without disruption to many industries. Interestingly, the lyrics in this month’s song, which was written back in 2018, foreshadow the concern some have today of AI technology – what will it take to make you capitulate/ we appreciate the power.

^1-6 All data referenced in the table and comments supplied by Morningstar as of 02-28-2026

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