On average, approximately 10% of an iceberg is visible above the ocean surface, while the remaining 90% is submerged below the waterline. What we can see with our naked eye is only 1/10th of the story, with the overwhelming mass of the berg being unseen beneath. In February 2026, much of the story in equity markets was told beneath the surface. The S&P500 headline performance was essentially flat (down -0.4%) but there was considerable divergence underneath. Small caps gained 2.5% while the Magnificent 7 sank nearly 6%. Value stocks delivered a 2.6% return while growth fell by roughly the same amount – an astounding monthly spread of over 5%. As was the case in January, equally weighted indices outperformed their capitalization weighted counterparts. Clearly, the “great rotation” out of large-cap tech and into less flashy, often overlooked sectors intensified in February, and that trend appears poised to continue.
While price action did not necessarily resemble a serious risk-off sentiment, there were several key developments during the month that contributed to the divergent performance. The “AI Disruption Theme,” which was introduced by the release of Anthropic’s Claude Bot, cut a swathe through software and information services stocks as the perception of AI as a productivity enhancer was flipped overnight to now being considered a clear and present danger to white-collar workers. A scathing investment memo by Citrini Research while detailed an AI disruption scenario resulting in 10% unemployment and a market sell-off of nearly 40% added fuel to the fire, accelerating what was already a brutal sell-off in the sector. The expanded software services sector fell -14.6% in January and a further 10% in February, now down nearly 35% from its high-water mark in October of last year.
Political and geopolitical concerns also rose to the fore last month. On the domestic front, the Supreme Court invalidated President Trump’s “reciprocal tariffs” nearly a year after their enactment. The court ruled that under the International Emergency Economic Powers Act, imported goods can be “regulated” but not taxed, and affirmed that Congress retains the authority to impose tariffs on our trading partners. The President responded as you might expect, imposing a new 15% blanket tariff across the board, utilizing Section 122 of the Trade Act of 1974. Other nation states and economic blocs took swift action, most notably in the European Union (freezing its trade agreement ratifications) and India (postponing a planned diplomatic visit to the US in protest). And while this was mostly a non-event for equity markets, it did result in a modest flight to safety trade, with both gold and silver popping on the news.
Internationally, the relationship between the United States and Iran has reached seriously concerning levels, with inflammatory rhetoric on both sides escalating dramatically. Iran’s infamous Revolutionary Guard continued live-fire drills and other military preparations, while the Iranian government temporarily closed the Strait of Hormuz, a critically important passageway for the flow of oil and other cargo. Oil prices rose dramatically and associated energy stocks surged. At one point in February, prediction markets were pricing in a 70% chance of military action against Iran, which was ultimately realized in the final days of the month. As of this writing in early March, the conflict has broadened beyond a simple spat between the two countries and has now engulfed the entire Middle East region, bringing geopolitical considerations back into the forefront of investors’ thinking.
Overlooked but not to be ignored, corporate earnings continued where they left off last quarter: record growth. With 96% of companies having reported, the S&P500 is tracking 14.2% earnings growth on an annual basis, which equates to five consecutive quarters of double-digit earnings growth. Headline revenue has also grown at a rate of 9% annually, and net profit margin clocked in at a heady 13.2%, which is the highest since FactSet started compiling the data in 2009. As one would imagine, the earnings growth remains clustered around technology and more specifically the Magnificent 7, which nearly tripled the rate of growth for the other 493 companies in the index. Still, the positive reports were broad based with all eleven sectors reporting growth in absolute terms. These results are impressive, and underscore both the breadth in the market and the fundamental health of corporate America.
Moving into the last month of the quarter, the markets will continue to grapple with the dynamics that reared up in February. With tariffs set to expire and further litigation anticipated, trade policy is likely to remain vague and uncertain into the foreseeable future. Likewise, any developments on the geopolitical front will have an immediate effect on both commodity and energy prices, with unknown spillover implications for both stock and bond markets alike. Finally, the AI disruption narrative is not yet fully fleshed out, and no one – not even Citrini Research – knows whether and to what extent these doomsday predictions will in fact come to pass. Still, the fundamental picture remains encouragingly positive, with a supportive earnings environment and market leadership that is broadening out, not deteriorating. As ever, we are prepared to contend with and react to any market developments as they arise.
We thank you for your ongoing trust and confidence.
Sincerely,
Jason D. Edinger, CFA
Chief Investment Officer
Altara Wealth
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.