Markets Stalled, but Strategy Remains Strong

The S&P 500 had stalled through February, and rising geopolitical tensions added a layer of uncertainty. It was no surprise to see the S&P 500 taking a pause in the first two months of the year—markets don't always move in a straight path higher.

A wave of headlines and uncertainty related to global relations, trade and tariff policy, central bank developments, and the potential growth of or disruption from artificial intelligence had caused some of the market's angst. However, 2026 began with a solid backdrop—strong corporate earnings, steady economic growth, and lower interest rates—that helped offset some of these concerns.

Through the last trading day in February, the index was essentially flat year-to-date. However, rising geopolitical tensions added a layer of uncertainty heading into March. Markets weakened as investors weighed potential impacts of the conflict in the Middle East, such as the potential for rising energy prices and affordability concerns, with the situation remaining fluid.

A Shift in Market Leadership

Beneath the surface of the S&P 500, a meaningful market rotation was taking place. Tech-heavy sectors—information technology, consumer discretionary, and communication services—have powered market gains in recent years, fueled by strong profits and growth optimism surrounding artificial intelligence (AI). But over the first two months of 2026, these sectors fell amid growing concerns around elevated valuations, the potential payoff from large capital spending, and business disruptions.

That shift weighed on the tech-heavy S&P 500. In contrast, a strong fundamental backdrop and a market rotation toward more value-oriented stocks propelled cyclical and defensive sectors higher. Consumer staples, industrials, materials, utilities, and energy all climbed more than 10% before the geopolitical uncertainty trimmed some of the gains.

Opportunities Amid Uncertainty

Market strength outside the S&P 500 provided a tailwind for well-diversified portfolios heading into the early-March weakness. While the S&P stalled, U.S. small- and mid-cap stocks—generally more economically sensitive and value-tilted than U.S. large caps—continued to trend higher amid the economy's position of strength.

International markets were also taking the lead. While the U.S. dollar has stabilized after a decline that boosted international returns in 2025, expansionary fiscal policies and looser monetary policies abroad contributed to their leadership through February. Emerging-market stocks, whose large tech sector continued to deliver gains, were up over 15%. Developed-market international stocks aren't far behind, posting around 10% gains prior to weakening amid the rising tensions in the Middle East.

Diversification is Key

Bondholders benefited on two fronts: ongoing interest income and rising bond prices as interest rates declined. Together, these forces helped lift total returns in bond markets, before weakening into March.

We suggest that investors revisit their goals and define a strategy that balances risk and reward by selecting the stock-bond mix that aligns with their objectives. Diversification is essential to manage risk and capture broad opportunities.

A Proactive Approach

Headlines and potential market volatility can cause stress when it comes to investing. But having a strategy in place that accounts for periodic market declines can help you stay proactive and remove emotion when times feel uncertain.

We recommend the following steps:

- Revisit your goals - Define a balanced risk-reward strategy - Diversify across asset classes

Investing in Uncertain Times

The global outlook remains constructive over the next one to three years. We favor a mix of quality and cyclical stocks across regions to help manage risk and capture broad opportunities.

Within the U.S., we prefer large- and mid-cap stocks. While geopolitical risks continue to evolve, we view a diversified set of U.S. stocks as a core equity holding over the long term, offering growth potential to help protect your spending power against inflation.

Emerging Markets: A Key Opportunity

Emerging-market stocks have led markets recently and continue to offer relatively attractive valuations. The asset class may benefit from fiscal support, its substantial technology exposure, and the potential for an additional Federal Reserve rate cut or two later this year.

Conclusion: Staying Disciplined in Uncertain Times

Staying disciplined, goal-focused, and diversified are key to creating a proactive game plan to navigate headlines and market volatility. Talk with your financial advisor about strengthening the foundation of your portfolio.