By Martin Baccardax
U.S. stocks were set to finish in negative territory for February, following on from January's modest gains, and head into the final stretch of the first quarter weighed down by worries over the artificial-intelligence trade, the path of Federal Reserve interest rates, and the outcome of U.S. nuclear talks with Iran.
The S&P 500 is nursing a 0.4% decline heading into the final trading day of the month and holding a modest 0.93% advance for the year after failing to rally on the back of a better-than-expected earnings report from Nvidia earlier in the week.
Software stocks continue to lead the downturn and have acted as the lynchpin for AI-related angst in the broader market.
The iShares Expanded Tech-Software Sector ETF, which is down nearly 30% from its early autumn peak, has shed another 8.5% this month amid renewed concerns that AI advances will cause generational disruption in the software sector and permanently upend use cases for some of its biggest constituents.
However, the largest stocks in the market, the so-called Magnificent Seven, also have dragged benchmarks lower. The cohort is down around 6.3% on the month, with Apple booking a solid 5.2% advance.
U.S. Treasuries, meanwhile, had their best month in a year, rising 1.5% in aggregate, according to Bloomberg data, and consolidating their case a as a risk-free destination for capital in times of broader market concerns.
The gains didn't match what was witnessed in gold, however, which has now gained 15.5% in February and is trading at $5,176 an ounce, nearly double where it closed in February 2025.
Fundstrat's Tom Lee said February "felt like a bear market" despite the modest level of decline for the S&P 500.
"I think many people are going to be glad to put this month behind them, and if you trace a path through it, you can see it was quite turbulent ...with everything from tariffs being overturned to AI concerns to gold's moves," he said.
But he also thinks the Magnificent Seven can lead a March comeback and help spark a broader market rally that can take the S&P 500 to his end-of-year price target of 7700.
Stocks in the group are, on average, trading at cheaper earnings multiples than the biggest stocks in the defensive consumer staples sector (once Tesla is removed from the calculation), he said, making them ripe for bargain hunters.
He's also expecting positive news on the economic front, starting with PMI activity data and a host of job market readings, including the Labor Department's jobs report for February, arriving next week.
"I think there's going to be dovish data this month, because the tariffs were overturned and we know the trend in CPI has been soft and we have concerns about the job market," he said. "And I think that leads to a dovish Fed meeting later in the month."
Rate traders aren't expecting any moves from the Fed when it wraps up its two-day policy meeting on March 18, but softer jobs and inflation data could set the table for a quarter-point reduction in April.
The odds of a cut at that meeting are currently at around 21%, according to the CME Group's FedWatch tool.
The market will need some form of support, either from a dovish Fed, a peaceful conclusion to tensions between Washington and Tehran, or a rebound in beaten-down software stocks that could trigger an improvement in broader risk sentiment.
But with volatility gauges on individual stocks continuing to rise, and the midterms elections in November looming, that will be no easy task.
"If you look at history during years where there's midterm elections, markets tend to have a lot of intra-year volatility," Saira Malik, chief investment officer at Nuveen, told CNBC late Thursday.
"On average, every year, markets declined 18% at some point during a midterm election year," she added. "That doesn't mean it ends up that way, but it means we're going to be in for some volatility."
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 27, 2026 07:40 ET (12:40 GMT)
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