Markets pulled back in February after a strong January. A Supreme Court tariff ruling, fresh debates about AI valuations and disruption, softer labor signals, and escalating Middle East conflict all contributed to volatility. At the same time, international stocks, small caps, and bonds held up better, reinforcing why diversification still matters.
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What moved markets in February
February reminded investors that markets rarely move in a straight line. After January pushed major indexes to new highs, sentiment shifted as several big stories landed at once: trade policy uncertainty, concerns about artificial intelligence, mixed labor market data, and an escalation in the U.S.-Iran conflict.
Despite the headlines, the commentary notes the broader economy remained healthy and corporate earnings continued to grow. For long-term investors, the key is usually not reacting to any single event, but keeping a portfolio aligned with goals and risk tolerance.
Snapshot of February markets
Here are selected highlights from the report:
- The S&P 500 fell 0.9% and the Nasdaq dropped 3.4%, while the Dow rose 0.2%.
- The VIX volatility index ended the month at 19.9, reflecting higher uncertainty.
- International developed stocks gained 4.5% (MSCI EAFE, USD terms) and emerging markets gained 5.4% (MSCI EM, USD terms).
- Small caps gained 0.7% (Russell 2000).
- The 10-year Treasury yield ended at 3.95%, and the Bloomberg Aggregate Bond Index rose 1.6%.
Quick perspective
When U.S. large-cap growth stocks stumble, a diversified portfolio often benefits from having other “engines” working. In February, international stocks and bonds helped offset U.S. equity weakness in many balanced allocations.
Supreme Court tariff ruling: what changed and why it matters
A major policy headline arrived on February 20, when the Supreme Court ruled against the administration’s use of IEEPA-based reciprocal tariffs. The report notes this decision could have broad implications, including possible refunds to businesses and consumers.
The White House pivoted quickly, implementing tariffs under Section 122 of the Trade Act of 1974, which allows tariffs of up to 15% for 150 days. Those new import duties went into effect February 24. The administration may also pursue other tools, including Section 301 (unfair trade practices) and Section 232 (national security restrictions).
What investors can take from this
The legal mechanism changed, but the policy direction did not. Trade uncertainty can keep markets choppy in the short run, while businesses adjust supply chains and pricing. The report also notes Treasury yields reflected some of this uncertainty, with the 10-year briefly dipping below 4%, supporting bond returns.
AI: from hype to “how disruptive, how fast?”
AI stayed front and center, but the focus shifted. Instead of only talking about lofty valuations, investors debated how quickly AI might disrupt existing business models. The report cites concerns such as:
- AI agents potentially compressing software margins
- Faster white-collar automation
- Quicker disruption of established business models
One practical outcome described in the commentary was a rotation away from mega-cap tech and toward sectors considered harder to displace, including energy, materials, and industrials. The report refers to this as a move toward “heavy assets, low obsolescence” companies, which helps explain why the Nasdaq lagged.
Growth cooled and the labor market sent mixed signals
The report notes that real GDP rose at a 1.4% annual rate in Q4 2025, down from 4.4% in the prior quarter and below expectations cited in the commentary. It attributes part of the slowdown to the record-long government shutdown and slower consumer spending, while business investment remained stronger, driven by AI data center spending. For all of 2025, the report notes real GDP growth of 2.2%, which it describes as healthy by historical standards.
On jobs, the unemployment rate edged down to 4.3% in January, with 130,000 payroll jobs added. However, annual benchmark revisions showed the economy created only 181,000 jobs in all of 2025 (about 15,000 per month), which the report says has led some economists to describe conditions as “jobless growth.”
International stocks and small caps led the way
One of the clearest themes was broader market leadership. After years when a relatively small group of large U.S. technology stocks drove many gains, February saw stronger results elsewhere. The report points to:
- Strong monthly gains for international developed and emerging markets
- Better relative performance for U.S. small caps
- A weaker U.S. dollar earlier in the year helping international returns in USD terms
A chart in the PDF (page 4) highlights how global stock market performance has diverged across regions over time, underscoring why different equity “buckets” can take turns leading.
Geopolitics and precious metals: risk can rise quickly
The commentary notes that on February 28, the U.S. and Israel launched military strikes against Iran, including the compound of Iran’s Supreme Leader, who the report says has been reported killed. It also references escalating conflict across the Middle East and uncertainty around Iran’s leadership.
The report also discusses precious metals. It notes gold and silver had strong gains (and emphasizes they can be volatile), reflecting factors like geopolitical uncertainty, central bank purchases, and concerns about fiscal deficits.
Key takeaways for long-term investors
- February was a reminder that headline risk can drive short-term volatility, even when the broader economy looks healthy.
- The tariff ruling changed the legal framework, but trade uncertainty is likely to remain a market factor.
- AI is still a major theme, but markets are increasingly focused on second-order effects like margins and disruption risk.
- Returns broadened beyond U.S. large caps – international stocks, small caps, and bonds helped offset weakness in parts of U.S. equities.
- A diversified portfolio can help investors stay invested through uncertainty, rather than trying to time reactions to fast-moving events.
FAQ
1) What does a Supreme Court tariff ruling mean for investors?
It can increase uncertainty for businesses and markets, especially around costs, supply chains, and pricing. The bigger investor takeaway is that trade policy can shift quickly, so diversification and risk management matter.
2) Why did international stocks outperform U.S. stocks in February?
The report points to broadening market leadership and notes that currency moves (a weaker dollar earlier in the year) can also boost international returns in U.S. dollar terms.
3) What is “market rotation” and why does it happen?
Rotation is when investors shift from one area of the market to another (for example, away from mega-cap tech and toward industrials or materials). It often happens when expectations change about growth, valuations, or risk.
4) If AI is disruptive, should investors avoid tech?
Not necessarily. The report highlights debate about disruption and valuations. For most investors, the question is not “tech or no tech,” but whether your portfolio has an appropriate balance across sectors and styles.
5) How should retirees think about months like February?
Volatility is uncomfortable, but it is normal. A plan that matches your spending needs, time horizon, and risk tolerance – supported by diversification – can help you avoid emotional, short-term decisions.
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Disclosure
This material is for informational purposes only and is not intended as investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Consult a qualified professional regarding your personal circumstances.