Global equities trended higher overall, yet the S&P 500 declined in February. The U.S. shed 92,000 jobs in the same month—the steepest non-recessionary monthly loss in years—while wage growth simultaneously accelerated to 3.8% year-over year. Nvidia beat analyst earnings expectations, provided positive guidance, and still shed more than a quarter of a trillion dollars in market capitalization the following day. And this is all before we consider geopolitical incidents—evolving by the minute, the Iranian conflict is given the attention it deserves on the following page.
Perhaps February’s most consequential macroeconomic event was the U.S. Supreme Court’s ruling that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unlawful. Effective rates had little time to settle lower before President Trump invoked Section 122, another tool in the administration’s kit to rebuild its trade regime, which itself is being challenged in courts.
Import duties are one of the presidency’s signature economic policies, generous tax cuts being another. Disrupting the tenuous balance between the two—one partially funds the other—could accentuate existing debt concerns as deficit spending spirals further. More immediately, several international trade agreements have been suspended in the wake of the news.
On the subject of disruption, the ongoing sell-off in technology is of interest. On the one hand, hyperscalers’ intense capital expenditures are coming under heightened scrutiny. On the other, the very companies they threaten to displace are facing heightened selling pressure over fears of automation and obsolescence. Steep expectations, capital-intensive innovation, and
market concentration create vulnerabilities—recent events have laid them bare.
Investors are not, as it stands, succumbing to the negatives.
If anything, these dynamics further the positive trend we’ve noted previously. Capital continues to flow to other industry sectors and geographies, widening market breadth. This typically marks a much healthier environment for investors, wherein more businesses can participate in advancing markets. It disperses risk and opportunity more equally across a broader spectrum. America and AI, while still replete with potential, are not the only destinations for investment capital.
The situation is concerning from both a humanitarian and a market perspective. The immediate impact has been a sharp surge in the price of oil as two main components of the energy market have been disrupted. Traffic through the Strait of Hormuz—through which one-fifth of global oil crosses—has come to a standstill, and Qatar’s state-run firm has shuttered its liquefied natural gas facilities, which account for ~20% of global LNG supply. Consumers are bracing for higher electricity bills and prices at the pump.
The severity of knock-on effects is almost purely a function of time. Inflation would be the first to manifest, potentially complicating central bank policy decisions ahead. From there, growth could decelerate. The longer the conflict lasts and the more collateral damage that accrues, the more shaken investors could become as higher energy prices work their way through the global economy. This sequence of events is a political problem for America. Wars are fought with munitions; midterm elections, however, might end this one. The cost of living is a leading voter concern, and with a thin majority, Republicans seeking re-election in Congress are likely to press for a swift resolution to bring the price of oil—which surpassed $100/barrel—back within range.
But capital markets and the companies they’re composed of are clinically logical and aim for efficiency above all else. This is where positives could emerge. Although it’s reasonable to assume there’s little appetite for a drawn-out conflict, supply shocks could make customers eager to sign long-term contracts with more reliable partners. We’ve made note of this previously in our Quarterly Insights; self-sufficiency and stable supply chains are becoming a matter of national interest. Corporate entities may soon see reliability as a worthy cost as well.
As far as markets are concerned, the ideal outcome would be for military activity to be relatively contained; a regime change or the degradation of key military assets could lessen Iran’s ability to project power across the region. From past experience, investors realize that military conflicts tend to have a short-lived impact on stock markets. For these reasons and more, markets have reacted far less than headlines have; the grace period, however, is not indefinite. We continue to monitor the situation closely, as volatility will create opportunities to take profits in certain sectors and also buy quality companies at reduced prices in others.
Cross-currents abound. Yields had been trending lower as rate-cut expectations built—supported in part by Kevin Warsh’s nomination as Fed Chair and a softening labor market—while inflationary pressures swelled even before the energy shock. In the near term, markets will be watching how the Trump administration plans to replace lost tariff revenues. Meanwhile, businesses are seeking refunds from an estimated $170B in unlawful duties. If obligated, meaningful debt issuance risks unsettling confidence in fiscal discipline at precisely the wrong moment and could send long-term bond yields higher.
Investors in well-diversified portfolios have pulled ahead of those with a bias for the S&P 500, technology stocks, and the United States in general. Small-cap and dividend growth stocks garnered renewed interest, while previously lagging sectors such as utilities and consumer staples were among February’s strongest performers. Looking toward the immediate future, the Iranian conflict is likely to drive investment decisions. The energy complex now commands a geopolitical premium but warrants close attention, as oil prices could reverse quickly on signs of a resolution. While recent concerns over capital expenditure discipline and AI-driven displacement in the technology sector are not unfounded, we believe the market’s broader verdict is arriving ahead of the evidence.
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