What the Duck
February proved to be a classic “duck market” — Just like the bird swimming in the water, it looked calm on the surface, but there was a lot of furious paddling going on underneath. In other words, even though headline stock indices didn’t change much for the month, there was a major rotation beneath the water. Instead of a handful of mega-cap technology names driving the market higher, the momentum shifted to other parts of the market. Small-cap stocks (as measured by the Russell 2000) meaningfully outperformed their larger peers and we saw a dramatic pivot from growth stocks to value stocks. Energy, Materials, and defensive sectors like Utilities and Staples were the clear darlings of the month, while previous high-flyers in software and mega-cap tech cooled off.
Why the pivot? Investors increasingly questioned not only the near-term payoff of massive capital expenditures on artificial intelligence, but the longer-term risks associated with the proliferation of AI capabilities. This uncertainty was likely at the heart of the tech profit-taking and the search for value in cyclical, old-economy sectors.
In a long-awaited broadening, nearly 65% of S&P 500 constituents beat the index itself during the month. While that would typically be viewed as a healthy development — laying a more sustainable foundation for a broader bull market – it’s not quite that simple.
Flocking to Safety
Risk sentiment remained decidedly tepid in February. Much of the capital rotating out of mega-cap tech went into defensive and yield-oriented parts of the market rather than toward aggressive growth. Consequently, traditional measures of economic cyclicality have started to break down in ways that warrant caution. For instance, Banks significantly underperformed the traditionally defensive Utilities. If the market were truly pricing in a robust economic reacceleration, this would be highly unusual. Similarly, Consumer Discretionary stocks have struggled to keep pace with Staples, suggesting that while households are still spending, they could be increasingly prioritizing needs over wants and/or reflecting the often-mentioned K-shaped economy. We’re also witnessing a noticeable divergence in factor performance, with high-beta stocks lagging far behind their low-volatility counterparts.
All of this paints a picture of a market that is broadening out, but doing so with a more cautious posture. Investors are diversifying not because they expect a synchronized economic boom, but because they are hedging against the uncertainty of a macroeconomic backdrop viewed less favorably than at the start of the year.
Market Recap
Macro
• Gross domestic product (GDP) rose 1.4% q/q annualized in the fourth quarter of 2025, below consensus of 2.8%, as the government shutdown led to lower government spending.
• The January Employment Situation report showed 130k jobs were added, double what consensus expected, while the unemployment rate fell to 4.3%.
• Though January CPI came in below expectations at 0.2% m/m and 2.4% y/y, core services ex-shelter (i.e. a more stable measure of underlying inflation) rose by 0.6% m/m, the most since last January.
• January PPI surprised to the upside at 0.5% m/m, driven by a 2.5% increase in trade services (i.e. retail & wholesale profits), the biggest monthly increase on record.
• Gold rose 7.1%, the fourth biggest monthly increase since March 2024.
Equities
• The S&P 500 largely fluctuated between index levels of 6,850 and 6,950 during the month, despite high intra-sector volatility.
• The atoms-over-bits investing theme continued to outperform in February: Physical “old-economy” sectors (atoms) outperformed digital, tech-sensitive sectors (bits).
• The Momentum factor (i.e. the top-performing stocks of the last 12 months minus the bottom stocks) led the leaderboards in February, with a return of 4.8%.
• Value stocks beat growth stocks by 5.0 percentage points, the fourth straight month of outperformance and the longest such streak since the end of 2022.
Fixed Income
• 10-year yields fell below 4% for the first time since late November.
• The spread between 10-year and 2-year yields narrowed by 14 basis points in February.
• Despite the tepid equity risk sentiment, corporate credit remained remarkably resilient. High-yield spreads tightened slightly to 310 basis points over Treasuries, reflecting strong corporate balance sheets.
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