Market Commentary - February 2026

The new year opened with meaningful developments on several fronts, including geopolitical shifts discussed at Davos and the market implications of Kevin Warsh’s Fed nomination. A strengthening IPO pipeline and solid earnings have supported sentiment even as Microsoft’s sharp post-earnings pullback showed how quickly investor expectations can shift. Markets continue to grind higher, but the path forward will require keeping one eye on opportunity and the other on risk.

Despite posting three weekly declines, the S&P 500 Index still ended January in positive territory, marking its ninth straight month of gains. Value stocks outperformed Growth stocks for the third consecutive month and now hold the lead on a one-year basis. International equity markets surged to start the year, outperforming U.S. markets. Sector performance in January was generally solid, with eight of eleven sectors positing gains, led by Energy, Materials, Consumer Staples and Industrials. Financial Services declined by 2.4 percent, making it the weakest performer. The Fixed Income markets generated positive returns last month, led by Municipal bonds.

A Spirit of Dialogue

The Davos Economic Forum, officially known as the World Economic Forum Annual Meeting, is an invitation-only gathering held every January in Davos, Switzerland. About 3,000 leaders from governments, major companies, universities and nonprofits head to the Swiss mountains to talk through the biggest economic, political and social issues shaping the year ahead. Davos is basically the Super Bowl of economic summits, only with more snow, more world leaders and fewer commercials. 

This year’s gathering made it clear that geopolitics remains central to the global outlook. Discussions focused on a world growing increasingly complex, shaped by U.S.–China dynamics, regional conflicts and evolving alliances. President Trump’s comments on Greenland and Venezuela added to the geopolitical buzz, generating significant media attention without materially shifting the broader economic narrative. Even with these flashpoints, leaders repeatedly emphasized the importance of ongoing dialogue and the need for pragmatic cooperation. Technology, particularly artificial intelligence, also played a prominent role, not as a distant concept but as an active force influencing policy and business strategy today.

Of the many Wall Street voices at Davos, J.P. Morgan provided one of the clearest and most balanced assessments of the outlook. From the firm’s perspective on the ground, the overall tone was cautious but notably constructive. While inflation and geopolitical uncertainty remain concerns, business leaders appeared more confident heading into 2026. Deal activity is strengthening, corporate sentiment is improving, and Europe is attracting renewed investor interest. AI continues to offer meaningful long term potential, even as near term expectations become more measured. Ultimately, Davos reinforced that uncertainty is likely to persist, but resilience, opportunity and continued dialogue provide a foundation for a more stable market environment.

A New Fed Chapter: The Warsh Nomination

Investors’ attention quickly shifted from Davos back to the United States when President Trump announced on January 30 his nomination of Kevin Warsh to be the next Chairman of the Federal Reserve. Warsh began his career with the mergers and acquisitions department at Morgan Stanley in 1995, where he worked until 2002, when President George W. Bush appointed him as a special assistant for economic policy. President Bush nominated Warsh to serve on the Board of Governors of the Fed in 2006, becoming the youngest person to hold that position at age 35. He left the Fed in 2011, partly due to his opposition to the central bank’s large-scale bond-buying programs aimed at lowering long-term interest rates and supporting bank lending. Since then, he has worked alongside billionaire investor Stanley Druckenmiller and has served as a senior fellow at the Hoover Institution.

A New Policy Tone from the Fed?

Wall Street commentary has generally focused on three themes: expectations that Warsh may take a firmer stance on inflation, the possibility of a more hawkish approach to the Fed’s balance sheet, and concerns that his policy tilt could mark a shift away from the recent era of accommodative monetary strategy.

A firmer stance on inflation may translate to a higher probability of “rates stay higher for longer.” If markets conclude that Warsh is more skeptical of aggressive rate-cutting cycles, investors may begin to price in a slower path toward easing. Long-duration, high valuation stocks could see more sensitivity while financials and cyclicals may hold up better.

A more hawkish approach to the Fed’s balance sheet may apply upward pressure on long-term yields. If Warsh signals that the Fed should continue shrinking its balance sheet or reduce its role as a buyer of long-term Treasury securities, that could put upward pressure on longer-dated yields. Banks and insurance companies, with their extensive bond portfolios, may benefit by improving interest margins and reinvestment returns.

Less tolerance for extended monetary accommodation may mean more sensitivity in rate-dependent parts of the market. Warsh’s prior skepticism about quantitative easing suggests he may resist policies that rely heavily on liquidity injections or long-duration forward guidance. The market impact may be negligible, as long as the economy remains resilient.

Taken together, these themes suggest that markets may begin to price in a more measured path toward rate cuts, a slightly firmer long-term rate environment, and a Fed less inclined to rely on the tools of the last decade’s ultra-easy monetary policy. Strategists have not sounded the warning bell, as they believe none of the outcomes would represent a shock to the system, but more of a recalibration of expectations.

Looking ahead, Warsh’s nomination now moves to the Senate, where his views on inflation, the balance sheet and crisis-era policymaking will be front and center. The confirmation process could take several weeks and will likely shape how quickly markets adjust their expectations for the path of interest rates.

A Reawakening in the IPO Market

As the policy backdrop continues to evolve, investor focus is also shifting toward the health of the capital markets themselves, with particular attention on the IPO landscape. After several years of subdued issuance, the pipeline is finally showing signs of life as companies feel more confident about valuations, earnings visibility and overall market stability heading into 2026. Recent deal flow suggests that investor appetite is improving — especially for profitable, well established businesses rather than speculative growth stories — and banks are reporting a growing backlog of companies preparing to come public. While the broader rate environment will influence the pace of activity, a steadier macro backdrop and a more predictable Fed path could help reopen the window for both traditional IPOs and follow on offerings. For markets, a healthier IPO environment is often a positive signal, reflecting not just rising risk appetite but also greater confidence among corporate leaders that conditions are supportive for long term growth.

The momentum building in the IPO market is backed by real numbers. Analysts expect 200–230 IPOs in 2026, raising an estimated $40–$60 billion, marking one of the strongest issuance years since 2021. Much of that strength comes from a robust pipeline of late stage private companies finally preparing to list after years of delays. At the top of the list are some of the most recognizable names in technology and AI: SpaceX, widely expected to raise as much as $30 billion with a potential valuation near $1.5 trillion; OpenAI and Anthropic, both considered leading candidates as AI native firms scale beyond what private markets can sustain; and major fintech names such as Stripe, Circle, and Kraken, each of which has been waiting for more stable market conditions. Even consumer facing brands are stepping in, with companies like Once Upon a Farm already filed and targeting early year offerings. Altogether, the depth and quality of the pipeline suggest a meaningful reopening of the public markets, driven by maturing technologies, improving valuations, and companies that now have both the scale and investor interest to support successful offerings.

When Great Earnings Are Not Enough: Microsoft’s Post-Earnings Slide

As investors digest the improving IPO outlook, they are also working through one of the more surprising market reactions this earnings season, which was Microsoft’s double-digit percentage price decline following what was objectively a very strong earnings report. Revenue and earnings both exceeded analysts’ expectations, Azure (Microsoft’s cloud platform) grew nearly 40 percent, and commercial demand indicators remained extremely robust. The stock’s sharp decline reflected concerns about the company’s unprecedented AI infrastructure spending and the timing of returns on that investment rather than any weakness in Microsoft’s underlying business. 

In its post earnings coverage, Barron’s emphasized that the market’s reaction had little to do with Microsoft’s headline results and everything to do with how investors interpreted the company’s AI strategy. The article noted that Copilot adoption remains modest at about 3 percent of the Microsoft 365 user base, which means the company’s early AI monetization “hasn’t moved the needle much” on revenue growth. 

Barron’s also highlighted investor frustration that Microsoft continues to divert scarce Azure capacity toward internal AI services rather than prioritizing higher margin cloud demand, a trade off many see as weighing on near term results. Taken together, the piece concluded that while the stock’s decline was sharp, it reflected investor impatience around AI returns rather than any material weakness in the underlying business.

Comments from our internal review reinforced this interpretation. Our research team emphasized that Microsoft “currently has a capacity issue” and that underlying demand for compute remains exceptionally strong. Azure growth would have exceeded 40 percent if newly available GPUs had been allocated fully to external cloud customers rather than to internal AI projects such as Copilot and ongoing research and development.

To understand why this matters, it helps to clarify what GPUs are. Graphics Processing Units are highly specialized chips designed to run thousands of calculations at once, making them essential for training and operating modern AI models. Unlike general purpose CPUs, which handle sequential tasks, GPU’s excel at the massive parallel processing needed for cloud-scale AI, data analysis, and the advanced workloads driving Microsoft’s growth. This dynamic helps explain why even a small constraint in GPU availability can ripple through Microsoft’s results and shape how investors interpret the company’s near-term execution. In short, the fundamentals remain firmly intact, and the recent volatility reflects sentiment and timing rather than any change in Microsoft’s long-term strategy.

Looking Ahead

As we step back from Microsoft’s results and look across the broader market, the year-to-date earnings picture for the S&P 500 Index has been notably strong. Roughly one-third of companies have reported so far, and 75 percent have delivered earnings about expectations, while 65 percent have exceeded revenue estimates, a solid showing even if slightly below long-term averages. Earnings growth is running at 12 percent year-over-year, which positions this quarter to mark the fifth consecutive period of double-digit earnings expansion, supported most heavily by the Technology, Industrials, and Communication Services sectors. For 2026, analysts expect earnings to grow 14 percent. If earnings growth continues at its current pace, the broader bull market may have plenty of fuel to keep grinding higher as solid fundamentals outweigh short-term bouts of volatility. Even so, the path higher is unlikely to be a straight line, and markets may continue to pause or pullback as they digest interest-rate uncertainty, geopolitical noise, and the growing pains of the AI investment cycle.

Thank you for your continued confidence in our team, and please reach out with any questions you may have. It is our pleasure to share life’s journey with you.

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Index Definitions

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Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978. 

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MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in the each country. 

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