- Investment Research Partners
- 2 days ago
- 6 min read
Executive Summary
The rotation in equity markets continued during February, as non-US and dividend-oriented stocks advanced while the S&P 500 and Nasdaq Composite (a proxy for large US technology-related stocks) declined.
A series of artificial intelligence (AI) related releases from Anthropic and OpenAI triggered a sell-off in enterprise software, cybersecurity, and legacy technology service companies as the market wrestled with how AI may impact different sectors of the market.
The US Supreme Court decision to strike down the use of President Trump’s IEEPA tariffs was the biggest headline, which overshadowed mixed economic data releases during the month.
As the month came to a close, US and Israeli strikes on Iran and the Pentagon’s battle with AI firm, Anthropic, introduced additional uncertainty into markets.
Market Divergence Continues
The S&P 500, a proxy for large US companies, retreated slightly during February (-0.9%). However, that relatively unremarkable return masked a headline-filled month for markets. The Nasdaq Composite index, a proxy for large US technology-related stocks, fell 3.4% for the month, representing the biggest monthly decline since the tariff-induced drawdown in March of last year.[1]
The negative return was driven in large part by a decline in technology service providers (commonly referred to as SaaS companies – software as a service) and cybersecurity firms. A series of product announcements by AI firms Anthropic and OpenAI sent shockwaves through the sectors in February, leaving investors wondering if advancements in AI may permanently disrupt some of those business models.[2] Even legacy tech firms, such as IBM, were caught up in the indiscriminate selling (IBM fell 13% in one day, the steepest daily loss in more than 25 years).[3]
On a positive note, many of the stocks affected did bounce back somewhat late in the month on announcements of agreements between several technology firms and leading AI providers.[4] The narrative reframe of AI as a complement to, rather than a replacement of, these services appeared to ease concern somewhat. Whether this attempt to reframe the discussion ultimately proves correct long-term remains to be seen. What is becoming clear is that AI is moving from theoretical to practical in some industries and that may lead to continued disruption and multiple compression as the technology progresses.
The rotational trade discussed in previous Dashboards continued in February. Despite declines in the S&P 500 and Nasdaq Composite indexes mentioned above, emerging markets (MSCI Emerging Markets index) and international stocks (MSCI EAFE index) posted strong monthly returns during the month (up 5.4% and 4.5%, respectively). In addition, dividend-oriented stocks proved resilient once again, advancing 4.8% for the month (S&P High Yield Dividend Aristocrats Index). Lastly, bonds (Bloomberg Aggregate Bond index) and gold (S&P GSCI Gold index) acted as safe havens during the volatile month, up 1.6% and 10.6%, respectively. As a result, diversified portfolios that include meaningful exposure to non-US stocks and diversifiers were once again rewarded in February.[5]
Tariff Announcement & Mixed Economic Data
Perhaps the most consequential economic development for the month was the US Supreme Court ruling that the International Emergency Economic Powers Act (IEEPA) does not authorize the president to impose tariffs. On February 20, the Court ruled 6-3 that the tariffs exceeded the president’s authority to regulate commerce during national emergencies. While President Trump immediately pivoted to Section 122 of the Trade Act of 1974 to reimpose broad-based tariffs, this statute requires Congressional ratification after 150 days.
The Supreme Court decision did not address what happens with the approximately $160 billion in tariff revenue already collected, however, leaving it to lower courts to determine.[6] The unknowns created by the decision, including what will happen to those funds and how this will impact the US deficit, add to the uncertainty around inflation and may reduce the likelihood of the Federal Reserve (Fed) reducing interest rates near-term.
Speaking of inflation, the December Core Personal Consumption Expenditures (Core PCE), which is the Fed’s preferred inflation measurement, came in at 3%, well above desired levels. The sideways path of inflation is another factor that may lead to the Fed exercising patience absent deterioration in the labor market or economy.
Fourth quarter economic activity, as measured by Gross Domestic Product (GDP), grew at just 1.4%, well below consensus estimates and much lower than the 4.4% pace in the third quarter. Additionally, the economy grew at a modest 2.2% for the full year in 2025, down from 2.8% in 2024. However, the Commerce Department and others noted that the government shutdown adversely impacted economic data in the fourth quarter.[7] As a result, economic activity appears to be relatively solid despite the somewhat disappointing headline data.
The Path Forward
As February comes to a close, market and economic data remain mixed and nuanced. As we discussed previously, there are positive and negative aspects of each as we enter March, and the Supreme Court’s decision on tariffs only adds to the uncertainty.
Furthermore, two events occurring at the end of the month add to the complexity. On Saturday, February 28, the US and Israel began striking targets in Iran after negotiations regarding Iran’s nuclear program and other issues ended without a compromise. The strikes killed Ali Khamenei, Iranian Supreme Leader, and other high-profile leaders within the country. Iran has retaliated with strikes across the region and shipping through the Strait of Hormuz has effectively halted. Unsurprisingly, oil prices have risen, with Brent Crude above $81 per barrel.[8] A situation of this magnitude bears watching as it has the potential to escalate and expand to involve other countries.
Separately, another disagreement, this one between the Defense Department and Anthropic, also grabbed headlines late in the month. The disagreement centered on whether the government can use Anthropic’s Claude, an advanced AI system, without any restrictions, which is the Defense Department’s demand. However, Anthropic insists that its systems not be used for fully lethal autonomous weapons or for domestic surveillance. As this piece goes to publication, Defense officials have threatened to cancel a recent contract with the firm, invoke the Defense Production Act, and designate Anthropic a supply-chain risk (an unprecedented step as the designation is typically reserved for firms based in U.S. adversary nations).[9] We will be watching for developments in this story, as it has the potential to impact markets and the economy given AI’s importance to both.
Given the events of the past month – including AI disruption, the Supreme Court’s tariff decision, and the conflict in the Middle East – we continue to advocate for diversification now as much as ever. Both risks and opportunities exist, however, the range of potential outcomes is even wider than normal in our opinion. We appreciate your continued trust and welcome the opportunity to speak with you in greater detail regarding your specific situation.
[1] Source: YCharts, February 28, 2026
[2] Source: CNN, “AI nerves are fraying. Anthropic keeps doubling down,” February 25, 2026. https://edition.cnn.com/2026/02/24/tech/anthropic-claude-plugins-office-jobs
[3] Source: Forbes, “IBM Shares Plummet 13%,” February 23, 2026. https://www.forbes.com/sites/tylerroush/2026/02/23/ibm-shares-plummet-13-worst-day-since-2000-after-anthropic-launches-programming-ai-tool/
[4] Source: CNBC, “Software stocks rebound as Anthropic announces new partnerships,” February 24, 2026. https://www.cnbc.com/2026/02/24/software-stocks-anthropic-ai.html
[5] Source: YCharts, February 28, 2026
[6] Source: Tax Foundation, “Supreme Court Trump Tariffs Ruling: Analysis,” February 20, 2026. https://taxfoundation.org/blog/supreme-court-trump-tariffs-ruling/
[7] Source: CNBC, “Fourth-quarter U.S. GDP up just 1.4%, badly missing estimate; inflation firms at 3%,” February 20, 2026. https://www.cnbc.com/2026/02/20/pce-inflation-december-2025.html
[8] Source: Bloomberg, “Iran War Ripples Across Region as Trump Vows ‘Whatever It Takes,’” March 3, 2026. https://www.bloomberg.com/news/articles/2026-03-03/trump-pledges-whatever-it-takes-on-iran-as-war-widens
[9] Source: Bloomberg, Anthropic Sees Support From Other Tech Workers in Feud With Pentagon,” February 27, 2026. https://www.bloomberg.com/news/articles/2026-02-27/anthropic-s-feud-with-pentagon-mushrooms-into-broader-battle
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