February Market Recap: Inflation, Tariffs, and the Return of Geopolitical Risk

Following a strong start to the year in January, markets encountered a bit more volatility in February. The S&P 500 declined approximately -0.76% (returns per Bloomberg), while fixed income provided ballast with the Bloomberg U.S. Aggregate Index finishing the month up 1.64% (returns per Bloomberg).

After an early-year rally that priced in optimism around growth and potential monetary policy easing, February became more of a recalibration month. Investors spent the month digesting inflation data, Federal Reserve commentary, renewed tariff developments, and a geopolitical event that few expected to occur this quickly: a direct U.S. military strike on Iran.

Taken together, these developments highlight an increasingly important reality for investors: today’s market environment is being driven by multiple macro forces simultaneously, and the range of possible outcomes is widening.

The Federal Reserve Remains Divided

As we noted in our previous commentary, the Federal Reserve held interest rates steady at 3.50–3.75% during its January 27–28 meeting as they announced. When the meeting minutes were released on February 18, they confirmed what many market participants suspected with policymakers remaining split on the prospect of future cuts.

Some members favor additional rate cuts later this year to support economic growth, while others prefer to see clearer evidence that inflation is sustainably trending lower before making any moves.

Of course, we believe inflation trends will be the core of that decision. On 2/20/26, the Bureau of Economic Analysis (“BEA”) released December’s Personal Consumption Expenditures (PCE) report (delayed due to the government shutdown), which is the Fed’s preferred inflation gauge. The figures came in slightly hotter than expected, rising 2.9% year-over-year and 0.4% month-over-month, both about 0.1% above Dow Jones estimates.

Markets reacted quickly. Fed futures pricing the probability of a 25-basis point June rate cut dropped from roughly 50% on 2/18/26 to 40% following the release the morning of 2/20/26.

That said, we do not believe that one data point makes a trend. Investors and policymakers alike will continue watching whether inflation continues to gradually moderate over the coming months. In our opinion, a sustained move lower would likely embolden policymakers, particularly as the Trump administration prepares to appoint a potentially more dovish Federal Reserve Chair in May.

Tariffs Return to the Global Conversation

February also saw trade policy reenter the spotlight. On February 24, the Trump administration invoked 15% global tariffs. The move followed a Supreme Court decision blocking the administration from unilaterally imposing tariffs under the International Emergency Economic Powers Act. In response, the administration pivoted to the Trade Act of 1974, which allows temporary tariffs for 150 days. After that period, the tariffs would require Congressional approval or a new legal basis to remain in place.

For markets, this development represents another layer of policy uncertainty, rather than an immediate structural shock. But it does reinforce an important theme: policy shifts can occur quickly and with meaningful implications for global trade flows and corporate earnings. From a portfolio perspective, adaptation becomes paramount.

AI Remains a Dominant Market Narrative

Earnings season once again highlighted the continued strength of the artificial intelligence theme.

One of the most notable reporting companies was Nvidia (“NVDA”), which reported their earnings on 2/25/26. NVDA exceeded both revenue and earnings expectations and issued stronger-than-anticipated guidance for its first fiscal quarter of 2026. Data center revenue remained the dominant growth engine, reflecting continued capital expenditure across the technology sector and broader enterprise adoption of AI infrastructure. These results reinforce our broader observation: AI adoption remains in its early innings.

However, markets often move ahead of fundamentals. Despite strong results, Nvidia and many of the other AI-related companies saw profit taking following the earnings announcement. At this stage, much of the near-term growth story for AI has already been priced into the market, and investors are increasingly looking for the next phase of growth narratives. Importantly, we do not believe this signals any structural weakness in the AI theme. Rather, we believe it reflects a natural dynamic of markets periodically pausing to digest strong gains.

The Return of Geopolitical Risk: The U.S. Strike on Iran

Perhaps the most unexpected development of the month came on February 28, when the United States launched a coordinated missile strike alongside Israel targeting Iranian leadership and military infrastructure.

The operation reportedly resulted in the death of Iran’s Supreme Leader, Ayatollah Ali Khamenei, and was framed as a preemptive move to curb Iran’s ability to develop nuclear weapons. Iran has already indicated its intent to retaliate, although the scale and scope of that response remain unclear.

As it stands, the conflict appears isolated between the United States, Israel, and Iran, but investors will be closely watching whether the situation broadens to involve additional regional or global actors.

Historically, markets have often shown resilience in the face of geopolitical shocks unless those events significantly disrupt global energy supply, major trade routes, and/or broader economic activity as war time can often suspend business activities to focus on supplying the fighting nations.

If the conflict remains contained, markets may ultimately treat the event as another temporary geopolitical risk premium. However, escalation scenarios could introduce new volatility across commodities, currencies, and global equity markets.

Why Scenario Planning Matters More Than Ever

What February demonstrated clearly is that markets are dealing with a litany of different risk scenarios.

Advisors must simultaneously consider multiple potential paths forward:

• Inflation continues falling and the Fed begins cutting rates

• Inflation proves stickier, delaying monetary easing

• Trade tensions escalate further, causing trade supply shocks

• The conflict in the Middle East broadens, introducing other nations and causing a greater global energy shock

• AI investment continues driving equity market leadership, and thus, narrow market leadership continues

• Market leadership rotates away from AI related companies and may itself experience a correction, even if the broad market does not

Each of these outcomes carries very different implications for portfolio construction.

This is precisely why we have noticed that many advisors are beginning to shift away from relying on a single base-case outlook and instead are evaluating how portfolios behave under multiple macro scenarios. To that end, they are trying to better understand their client portfolio risks before dealing with difficult conversations. Additionally, we believe it serves as a marketing tool for an advisor to demonstrate their value to prospective clients in that they are managing portfolios for these risks.

We believe as advisors, the need to stress-test portfolios across a range of potential economic environments, from rate cuts and inflation shocks to geopolitical conflicts and trade disruptions, is key for both client retention and client growth. In our opinion, successful portfolio management isn’t just about predicting the future. It’s about preparing for the various risks that the market may throws at us.

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