February 2026 Market Recap

The US Supreme Court struck down tariffs imposed under IEEPA (International Emergency Economic Powers Act).

The Trump administration responded by announcing a 10% "global tariff" under Section 122, which could rise to 15%. This surcharge is expected to remain in effect until late July, when more permanent tariffs under Section 232 and 301 are expected to be implemented.

The new tariff regime has reduced the effective US tariff rate by about 3 percentage points, primarily benefiting countries like Brazil and China. Crucially, the Supreme Court's decision reaffirms ISG’s view that the system of checks and balances in the US is holding up, a factor that has lent support to the dollar, with the DXY index up 0.6% in February.

The markets: rotation

The equity market digested more Q4 earnings releases, with S&P 500 earnings up about 14% year over year thus far. Despite robust earnings, both the S&P 500 and the NASDAQ delivered negative returns of respectively 0.8% and 2.3% in February.

Concurrently, non-US developed market equities (MSCI EAFE) returned 5.5%, as investors rotated away from large-cap technology growth stocks toward cyclical, "old-economy" sectors amid concerns surrounding AI spending and automation.

Emerging market equities (MSCI EM) returned 5.5% in February, boosted by strong performances in Korea and Taiwan benefiting from increased AI capex, leading ISG to revise up their EM earnings expectations to 24%.

The rates market has not been immune to sector-specific concerns originating from equities. Although activity and inflation data were slightly stronger than anticipated, yields declined across various markets as investors expressed concerns regarding the potential impact of AI on macroeconomic indicators. Specifically, 10-year US Treasuries fell by 29 basis points.

The economy: holding steady

US GDP in Q4 2025 surprised to the downside, growing 1.4% annualized. The shortfall was primarily driven by weaker government spending linked to the shutdown. Underlying growth remained solid: Personal consumption expenditures and final private domestic sales both rose 2.4% annualized, while tech investment posted another strong quarter.

Looking ahead, ISG expects real incomes to improve as the labor market firms and inflation eases, supporting solid—though somewhat slower—consumption growth through 2026.

After a strong result in January, the February labor market report was weak, with nonfarm payrolls falling by 92,000 and the unemployment rate edging up to 4.4%.

While this dampens expectations for an accelerating labor market, ISG highlighted several one-off factors that contributed to the decline in jobs, including seasonal adjustments, inclement weather, and strikes that led to 31,000 healthcare workers being absent in February.

Meanwhile, PCE inflation—the Federal Reserve’s preferred measure—inched up to 2.9% in December, driven by both goods and services, and is likely to remain elevated in January as well.

Nonetheless, ISG expects inflation to decline gradually from here, particularly because the tariff pass-through now looks to be well advanced. Given this backdrop, ISG does not see a strong case for an imminent Fed rate cut and continues to expect rate cuts in June and September, contingent on clear evidence of further disinflation. 

Looking ahead

ISG is closely monitoring the evolving situation in the Middle East. They are also focused on several central bank meetings, with the Fed, the European Central Bank, and the Bank of Japan expected to remain on hold, while the Bank of England may signal further easing. ISG is also tracking announcements in the run-up to President Trump’s visit to China in late March/early April.