Overview
February 2026 delivered a more challenging environment than January, as a deteriorating U.S. labor market, escalating Middle East tensions following U.S.-Israeli military action against Iran, and AI-disruption fears in the technology sector weighed on sentiment. The S&P 500 finished the month down approximately 0.9%, while the Nasdaq fell 3.4%, though the Dow Jones edged up 0.2%. Canadian equities held up considerably better, with the S&P/TSX Composite delivering a 7.6% price return for the month, propelled by Materials, Financials, and especially Energy, pushing the year-to-date gain to 8.3%. Both central banks remained on hold against a backdrop of elevated uncertainty and conflicting economic signals.
U.S. Market Performance & Policy
U.S. equities were mixed, with the S&P 500 declining as concerns over AI disruption, tariffs, and escalating Middle East tensions weighed on sentiment. The AI narrative shifted sharply from optimism to fears about its impact, pressuring growth stocks while value and small caps posted gains. No FOMC meeting was scheduled for February; the Fed remained in a data-dependent holding pattern at 3.50% to 3.75%, with market pricing in the first potential cut no earlier than the second half of 2026. Looking ahead, investor focus will center on incoming inflation data, the trajectory of geopolitical risk premiums in energy markets, and any Fed communication signaling a recalibration of the easing timeline.
Key U.S. Economic Data
Federal funds rate: Held at 3.50%–3.75%. Policy remains on pause as the Fed balances still-elevated services inflation against a softening labor market.
Unemployment/Payrolls: The U.S. economy shed 92,000 jobs in February, the most in four months, well short of the 59,000 consensus forecast. Health care declined 28,000, reflecting strike activity, while information and the federal government continued to trend lower. The unemployment rate held at 4.3%.
CPI: The CPI rose 0.3% month-over-month and 2.4% year-over-year, with shelter as the largest contributor. Food rose 0.4% and energy climbed 0.6%. Core CPI held at 2.5% year-over-year.
Consumer Confidence: The Conference Board index recovered modestly to 91.2 in February, up 2.2 points from a downwardly revised January reading, though it remained well below the four-year peak of 112.8 reached in November 2024.
ISM Manufacturing: The PMI held at 52.4%, marking a second consecutive month of expansion. Price pressures intensified sharply, with the Prices Paid subindex hitting its highest level since June 2022, driven by steel, aluminum, and tariff-related input costs.
ISM Services: The Services PMI surged to 56.1%, its highest reading since July 2022 and its 20th consecutive month in expansion territory, up 2.3 points from January’s 53.8%, with Business Activity at 59.9% and New Orders at 58.6%.
Canadian Market Update
The TSX delivered a 7.6% price return in February. Materials led by a wide margin, with Financials, Energy, Communication Services, Health Care, Industrials, Consumer Discretionary, and Consumer Staples all posting gains. The only detractors were Real Estate (0.6%) and Technology (6.3%). The Technology underperformance mirrored the U.S. dynamic, as AI disruption fears punished software names globally while resource-linked and hardware-adjacent issuers benefited from the rotation toward tangible assets and earnings visibility. Gold stocks continued to attract capital as a safe-haven allocation, with gold advancing roughly 11% on the month amid elevated geopolitical risk.
On the macro side, the Bank of Canada held its overnight rate at 2.25%, reiterating that the economy continues to adjust to U.S. tariffs and the new global trade landscape, with growth expected to remain modest and inflation projected to stay near the 2% target. The next scheduled BoC decision is March 18, 2026.
Outlook
February reinforces a widening bifurcation: the U.S. services sector is accelerating while the labor market softens, keeping the Fed anchored well into 2026. The Middle East conflict introduces a stagflationary risk vector that warrants close monitoring into Q2. In Canada, the outperformance of Materials and resource linked sectors continues to differentiate the TSX from U.S. equities, though Technology weakness and trade uncertainty remain active drags. The current environment favors quality cyclicals with earnings durability, defensive income-producing assets, and selective commodity exposure, while maintaining discipline around high-multiple growth names exposed to both rate stickiness and AI-driven business model disruption.
