Executive Summary 

February 2026 was defined by geopolitical tension between the U.S. and Iran. Markets shifted to a defensive posture as capital moved from U.S. technology stocks toward international markets and traditional industries. This transition was triggered by the “AI Scare Trade,” where investors sold software and cybersecurity equities on fears that Anthropic’s Claude and similar tools would disrupt established business models and commoditize legacy platforms. 

In the U.S., the macro outlook weakened following a 1.4% GDP print, impacted by the recent government shutdown. Uncertainty increased with the nomination of Kevin Warsh as Fed Chair, leading markets to price in higher interest rates and a focus on shrinking the Fed’s balance sheet. The month concluded with Operation Epic Fury, U.S. military strikes on Iran, which established a high-volatility environment for March. 

Equity Markets Performance 

Major Index Movements U.S. indices struggled throughout February. The S&P 500 fell 0.87% and the Nasdaq recorded its worst performance in over a year. Small caps experienced a complete reversal from January; the Russell 2000 dropped 3.92%. This decline reflected concerns that a “Warsh Fed” will maintain high borrowing costs for an extended period, disproportionately affecting smaller, debt-sensitive companies. 

International Performance International stocks showed relative strength. The MSCI EAFE (Developed) gained 3.93% and MSCI Emerging Markets rose 5.57%. Gains were driven by the AI hardware cycle in Taiwan and South Korea and market pricing of significant fiscal spending. 

Sector Performance  

Sector results show a rotation into physical assets and infrastructure. Investors prioritized industries providing the resources needed for the economy over high-multiple software. 

• Energy (XLE): +11.84% – The top performer. This rally followed rising Middle East tensions as the market priced in higher oil and gas costs. 

• Utilities (XLU): +10.05% – Investors focused on the electricity and water cooling requirements of AI data centers. The sector also functioned as a defensive haven during the U.S. economic slowdown. 

• Consumer Staples (XLP): +7.34% – Capital moved into Walmart and Philip Morris as investors sought reliable earnings. 

• Industrials (XLI): +7.30% – Strength was maintained by demand for the physical components of AI, including power grids and data center construction. 

• Technology (XLK): -1.60% – The worst-performing sector. Software and cybersecurity were pressured by the “AI Scare Trade.” Microsoft dropped 11.57%, reflecting a shift in investor patience regarding the immediate profitability of AI infrastructure spending. 

Fixed Income 

Treasury yields fell across the curve as investors sought safety. The 2-year yield fell 20 bps (from 3.57% to 3.37%), the 10-year dropped 31.5 bps (from 4.277% to 3.962%), and the 30-year declined 27.6 bps (from 4.909% to 4.633%). 

This rally was a response to the flight from riskier assets amid concerns over U.S. growth, geopolitical instability, and AI-related disruption. Despite the yield decline, stagflation concerns remained relevant after January producer prices exceeded expectations. This data kept pressure on risk assets while maintaining demand for government debt. 

Commodities 

Metals 

In February, gold and silver underwent a correction. Gold declined 2.8% and silver fell 23%. Silver’s 23% drop included its worst single-day performance since 1980, as retail positioning accelerated the move. 

By the end of the month, prices stabilized. Safe-haven demand returned following U.S. military warnings regarding Iran. Gold ended February at $5,278.10 per ounce and Silver at $93.72 per ounce. 

Energy 

Energy prices rose as Iran-related risks outweighed a decline in global demand. WTI Crude began the month in the mid-$60s but climbed as U.S.-Iran negotiations stalled and military warnings in the Persian Gulf increased. WTI Crude finished at $67.02 per barrel and Brent at $72.87. 

Conversely, LNG prices fell 23% to $2.86 due to a mild winter, despite record export volumes. Market focus has shifted to the risk of a blockade in the Strait of Hormuz, which could push prices toward $100 if Iranian infrastructure is targeted. 

Cryptocurrency 

Bitcoin followed the broader de-risking trend, falling from $77,000 at the start of February to $66,000 at month-end, a 14% decline. Selling was concentrated in the final week as investors reduced exposure to speculative assets. 

International Markets 

• South Korea and Taiwan: These were the top-performing global markets. The South Korean KOSPI rose 26.15%, crossing 6,000 for the first time. Taiwan’s TAIEX gained 12%. This was driven by demand for AI memory chips from Samsung and SK Hynix, and TSMC’s $2 trillion market value. Hardware spending commitments from Microsoft and Meta provided direct revenue support for these suppliers. 

• China: The CSI 300 gained 2.27%. The index was supported by the domestic AI buildout and momentum from DeepSeek. Resilient export data and expectations of policy support from Beijing provided stability, despite the PBoC holding rates steady. 

• India: The Nifty 50 fell 0.3%, underperforming regional peers. The index was pressured by a weaker rupee and declines in the IT sector. Concerns persist that AI automation will negatively impactIndia’s outsourcing business model. Foreign investors bought $2.5 billion in local stocks late in the month, but this did not offset earlier losses.