February served as a reminder that markets rarely move in a single direction. After a strong January that pushed major indexes to record highs, sentiment changed due to a major Supreme Court decision on tariffs, worries about artificial intelligence, weaker job market data, and rising tensions in the Middle East. At the same time, stocks from other countries and smaller U.S. companies kept performing well, and bonds gained ground — showing why holding a mix of different investments matters.
While news headlines can cause short-term swings in the market, the broader economy remains in good shape and company profits continue to grow. Instead of reacting to any one piece of news, investors are generally better off keeping a well-diversified portfolio — one that spreads investments across different types of assets — that is in line with their long-term financial goals.
Key Market and Economic Highlights for February
• The S&P 500 (an index tracking 500 large U.S. companies) fell -0.9% and the Nasdaq Composite (which is heavily weighted toward technology companies) dropped -3.4% for the month. Meanwhile, the Dow Jones Industrial Average (an index of 30 major U.S. companies) rose 0.2%.
• The CBOE VIX volatility index — a measure of how much the market expects prices to swing, sometimes called the “fear gauge” — rose to 19.9 by month’s end, driven by AI-related concerns and uncertainty around trade policy.
• International developed markets (stocks from wealthy countries outside the U.S.) jumped 4.5% based on the MSCI EAFE Index in US dollar terms, while emerging markets (stocks from developing economies) gained 5.4% based on the MSCI EM Index. Year-to-date, they have gained 9.9% and 14.6%, respectively.
• U.S. small cap stocks (shares in smaller companies) gained 0.7% based on the Russell 2000.
• The 10-year Treasury yield (the interest rate on a 10-year U.S. government bond) ended the month lower at 3.95%. This is the first month it has fallen below 4% since last November. The Bloomberg Aggregate Bond Index rose 1.6%.
• Gold closed lower at $5,279 per ounce but reached as low as $4,661 at the beginning of the month. Silver ended lower at $93.79 per month.
• The U.S. dollar index rose slightly to 97.6.
• January inflation showed headline CPI at 2.4% year-over-year and core CPI at 2.5%, while the core PCE price index rose 0.4% month-over-month, the sharpest increase in a year.
• The unemployment rate edged down to 4.3% in January, with 130,000 nonfarm payroll jobs added. However, annual benchmark revisions showed the economy created only 181,000 jobs in all of 2025, roughly 15,000 per month.
• On February 20, the Supreme Court ruled against the administration’s use of IEEPA-based reciprocal tariffs, prompting a pivot to alternative trade laws.
• On February 28, the U.S. and Israel launched military strikes against Iran, including the compound of Iran’s Supreme Leader who has been reported killed.
A Supreme Court decision changes the rules on trade policy
The biggest policy event in February was the Supreme Court’s February 20 ruling against the administration’s tariffs (fees charged on imported goods). These tariffs had originally been put in place using the International Emergency Economic Powers Act (IEEPA) to apply matching tariffs against most countries the U.S. trades with. The ruling has wide-reaching consequences, including the possibility that businesses and consumers could receive refunds.
After the ruling, the White House quickly moved to base new tariffs on a different law — Section 122 of the Trade Act of 1974 — which allows the president to apply tariffs of up to 15% for up to 150 days. These new import charges went into effect on February 24. The administration is also expected to look at other legal paths, including Section 301 of the Trade Act of 1974, which addresses unfair trade practices, and Section 232 of the Trade Expansion Act of 1962, which covers restrictions related to national security.
For investors, the key point is that while the legal basis for tariffs has changed, the overall direction of trade policy has not. Uncertainty around trade will continue to make headlines and cause market swings. However, as history has shown, markets tend to adjust to changes in trade policy over time, especially as companies find new ways to manage their supply chains and set their prices.
Bond markets reflected some of this uncertainty as well. The 10-year Treasury yield briefly dropped below 4% for the first time since November. This movement helped bond portfolios in February and is a good reminder of why bonds — which often rise when stocks fall — are an important part of a balanced investment portfolio.
AI excitement meets valuation concerns
Artificial intelligence (AI) remained a major topic in February, but the conversation shifted. Instead of focusing on high stock valuations (the price investors pay for a share of a company relative to its earnings), investors began debating how quickly AI could disrupt existing business models. Some worry that AI tools could squeeze profit margins for software companies, replace white-collar workers through automation, and change traditional industries faster than expected.
These worries have sparked a notable shift in where investors are putting their money. Many have been moving away from large technology companies and toward sectors that are seen as harder to replace by AI, such as energy, materials, and manufacturing. This shift — sometimes described as a move toward “heavy assets, low obsolescence” (HALO) companies — helps explain why technology-heavy indexes like the Nasdaq fell while other parts of the market rose.
Although market swings can be uncomfortable, this kind of rotation is actually a healthy sign for long-term investors who have been worried about high stock valuations in recent years.
Economic growth slowed while the job market sent mixed signals
According to the Bureau of Economic Analysis, real GDP (the total value of goods and services produced in the U.S., adjusted for inflation) grew at an annual rate of 1.4% in the fourth quarter of 2025. That was down from 4.4% in the previous quarter and below the market’s expectation of 2.5%. The slowdown was partly tied to the record-long government shutdown and slower consumer spending. On the positive side, business investment grew 3.7% on an annualized basis, driven by record-setting investments in AI data centers. For all of 2025, real GDP grew 2.2%, which is still considered healthy by historical standards.
The job market painted a more mixed picture. While the unemployment rate edged down to 4.3% in January, updated figures from the Bureau of Labor Statistics told a weaker story. The economy added only 181,000 jobs throughout all of 2025 — averaging just about 15,000 per month.
Some economists have described this as “jobless growth” — a situation where the economy expands but does not create many new jobs. The gap between GDP growth and job creation has been growing since mid-2022, raising questions about how broadly the current economic expansion is being felt.
International stocks and small caps outperformed in February
One of the standout stories in February was the continued strong performance of investments beyond large U.S. technology companies. International developed market stocks rose nearly 5% for the month, and emerging market stocks gained over 5%. U.S. small cap stocks posted their best monthly gain since August, with the Russell 2000 index up roughly 5% year-to-date — well ahead of the S&P 500.
This wider spread of market gains is an encouraging development for investors who hold a diversified portfolio. After several years in which only a handful of large U.S. technology companies drove most of the market’s returns, the recent shift toward international stocks, smaller companies, and cyclical sectors (industries that tend to do well when the economy grows, such as energy and manufacturing) suggests investors are finding opportunities in a broader range of assets. A weaker U.S. dollar earlier in the year also helped boost returns on international investments when converted back into U.S. dollars.
Precious metals also continued to perform well, with gold and silver gaining 6.8% and 8.1%, respectively. These gains reflect a mix of geopolitical uncertainty, central bank buying, and concerns about government debt levels. While precious metals can serve a useful role in a diversified portfolio, January’s sharp pullback is a reminder that they can be quite volatile.
Another key development at the end of February was the escalation in U.S.-Iran tensions following strikes across the Middle East and reports surrounding the death of Iran’s supreme leader, Ali Khamenei. While the situation continues to unfold and geopolitical events can create uncertainty, history shows that staying invested through these periods has generally been the best approach for long-term investors.
The bottom line? February’s weakness in U.S. stocks was balanced by strong performance in international markets, smaller companies, and bonds. While AI developments and trade policy uncertainty will continue to drive headlines, the broadening of market leadership across different asset types is an encouraging sign for long-term investors.
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