Comments

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.

Overview

Global equities started 2026 on a constructive but uneven footing, with U.S. and Canadian markets eking out modest gains amid lingering macro and policy uncertainty. In the U.S., the S&P 500 advanced a little over 1% for the month, supported by cyclicals and defensives such as Energy, Materials, and Consumer Staples, even as Health Care, Technology, and Financials lagged. In Canada, the S&P/TSX Composite briefly hit a record high before late-month volatility pared returns to a roughly 0.7% gain, with strength in resource‑linked sectors offset by weakness in growth and rate‑sensitive names. Central banks stayed in wait‑and‑see mode: the Federal Reserve held rates steady while acknowledging elevated uncertainty, and the Bank of Canada maintained its policy rate at 2.25% as the economy continues to adjust to trade headwinds.

U.S. Market Performance & Policy

The S&P 500 finished January modestly higher, with sector leadership tilting toward Energy, Materials, and Consumer Staples, while Health Care, Technology, and Financials underperformed. Sentiment was cautiously optimistic as investors weighed improving manufacturing data and resilient services activity against sharply weaker consumer confidence and ongoing geopolitical and trade risks. A key focal point was the late‑January FOMC meeting, where the Fed kept its target range at 3.50%–3.75% and highlighted solid growth but still‑elevated inflation and an uncertain outlook, reinforcing a data‑dependent stance. Looking ahead to February, markets are focused on incoming inflation prints, labor‑market data following January’s upside payroll surprise, and any shift in Fed communication that could recalibrate expectations for further easing in 2026.

Key U.S. Economic Data

• Federal funds rate: Target range held at 3.50%–3.75% at the January FOMC meeting; policy is framed around balancing solid activity with somewhat elevated inflation and elevated uncertainty.​
• Unemployment: The jobless rate edged down to 4.3% in January, with nonfarm payrolls rising by about 130,000, beating expectations and easing some concerns about labor‑market softness.
• Consumer Confidence Index: The Conference Board index fell 9.7 points to 84.5, its lowest level in nearly 12 years, reflecting growing worries about prices, jobs, and broader economic and geopolitical risks.
• ISM Manufacturing Index: The ISM Manufacturing PMI jumped to 52.6 in January from 47.9, signaling a return to expansion and the strongest reading since 2022.
• ISM Services Index: The ISM Services PMI held at 53.8, marking a 19th consecutive month of expansion and indicating a still‑solid services backdrop.

Canadian Market Update

The S&P/TSX Composite started the year strongly, reaching an all‑time high near 33,200 before a sharp pullback in the final days left the index up about 0.7% for January. Performance was mixed beneath the surface: Materials, Communication Services, Utilities, Real Estate, and Industrials ended the month in positive territory, with Materials leading by a wide margin, while Technology, Consumer Discretionary, Health Care, Consumer Staples, and Financials registered declines. Energy was a notable bright spot, supported by higher crude prices amid elevated geopolitical risk, while late‑month weakness in gold and silver weighed on Materials but did not erase earlier gains. Notably, within the Technology space there was a divergence, with hardware-related names outperforming software companies as investors favored tangible demand exposure and balance-sheet strength over higher-multiple growth segments. This split underscored a broader preference for more defensive tech exposure amid rate and earnings uncertainty.

Macro data painted a picture of a soft but not collapsing economy: Canada’s unemployment rate ticked down to 6.5% in January despite a net loss of around 25,000 jobs, driven largely by manufacturing and part‑time employment. Against this backdrop, the Bank of Canada held its overnight rate at 2.25%, reiterating that policy is “about right” as the economy adjusts to U.S. tariffs and a more challenging global trade environment, with inflation expected to remain near the 2% target. Investor focus in Canada remained on high‑quality issuers in Financials and resource‑linked sectors, particularly companies with robust balance sheets and disciplined capital allocation.

Outlook

As 2026 gets underway, markets appear to be transitioning from a purely rate‑driven narrative toward one centered on earnings durability, sector positioning, and productivity. In the U.S., improving manufacturing momentum and steady services growth are supportive, but weak consumer confidence and elevated policy and geopolitical uncertainty argue for a measured stance. In Canada, stable monetary policy, a still‑elevated but easing unemployment rate, and resilient resource sectors suggest a cautiously constructive backdrop, albeit with ongoing sensitivity to trade developments and commodity volatility. For diversified investors, maintaining balanced exposure across quality growth, cyclicals leveraged to a slow‑growth environment, and resilient income‑producing assets—while staying attentive to central‑bank guidance and labor‑market trends—remains a prudent way to navigate what is likely to be another active year for markets.

Overview

Global markets closed out 2025 with mixed performance as investors repositioned portfolios and reset expectations for 2026. In the U.S., equity markets finished December essentially flat, as gains in Financials, Technology, and Communication Services were offset by weakness in Utilities, Real Estate, and select defensive sectors. International equities outperformed, with Emerging Markets and developed markets leading returns.

In Canada, the S&P/TSX Composite posted modest gains, supported by strength in Financials and Materials as commodity prices remained relatively firm. Investor sentiment continued to be shaped by central bank policy signals, easing inflation data, labor market trends, and ongoing geopolitical and trade-related uncertainty.

U.S. Market Performance & Policy

The S&P 500 ended December little changed, capping off a volatile but strong year. Sector leadership rotated, with Financials leading the market as rate expectations stabilized and balance-sheet quality regained investor focus. Technology and Communication Services also posted gains, while Utilities and Real Estate underperformed amid rising long-term interest rates.

The Federal Reserve cut the federal funds rate by an additional 25 basis points in December, bringing the target range to 3.50% – 3.75% and totaling 75 basis points of cuts in 2025. While the Fed acknowledged easing inflation trends, policymakers signaled a more cautious stance going forward. Market expectations for further near-term cuts declined, with attention shifting toward incoming inflation and labor data ahead of the January FOMC meeting.

Key U.S. Economic Data 

• Federal Funds Rate: Reduced by 25 bps in December; policy now viewed as closer to neutral. 

• ISM Manufacturing PMI: Declined to 48.2, indicating continued contraction in manufacturing activity. 

• ISM Services PMI: Increased to 52.6, reflecting ongoing expansion in the services sector. 

• Labor Market: Payroll growth exceeded expectations, while unemployment edged higher to 4.6%. 

• Inflation: Headline and core inflation resumed their downward trend, with November readings near 2.7%. 

Canadian Market Overview 

The S&P/TSX Composite recorded modest gains in December, supported by Financials, Materials, and Industrials. Gold prices moved higher, while oil prices declined modestly, contributing to mixed performance across resource sectors. Investor interest remained focused on high-quality growth names and companies with strong balance sheets. 

The Bank of Canada held its policy rate steady, reiterating that previous rate hikes are still working through the economy. Statistics Canada data showed easing inflation and mixed domestic demand, while international investor demand for Canadian equities remained supportive of the TSX. 

Outlook 

As markets enter early 2026, the investment landscape appears to be shifting away from a rate-dominated environment toward one driven by earnings quality, sector selection, and productivity trends. While economic growth is slowing, it remains positive, and inflation continues to moderate. For diversified portfolios, maintaining exposure to quality growth, value-oriented cyclicals, and resilient income assets—while closely monitoring central bank guidance and labor market conditions—remains a disciplined approach in a more balanced but still volatile market environment.