Split Personality

 Last Tuesday, the stock market began the holiday-shortened week in a foul mood but recovered to its chipper old self by the end of the week. Several of the artificial intelligence companies suffered tantrums of selling Tuesday morning, forcing the broad averages down to near their prior week’s lows in early trading. Thankfully, that funk quickly faded and all of the early losses were recovered by the end of the session. The recent aversion to tech companies was at least temporarily forgotten Wednesday morning. Semiconductor stocks in particular were once again feeling the love. The NASDAQ Composite Index (COMP) ended the day with a gain of 0.8%. The S&P 500 Index (SPX) rose 0.6%, just barely enough to get the index back into the black year-to-date (YTD).

The market’s yin yang nature returned on Thursday with both SPX and COMP enjoying early gains. Functioning as the Prozac for the market that morning was the report on initial unemployment claims, which came in much lower than expected 206,000 versus the consensus of economists of 215,000. Unfortunately, the funk quickly returned, and all of the early gains were given back by the end of the day. SPX and COMP ended the session with net losses of about 0.3%.

The updated estimate of fourth-quarter U.S. gross domestic product (GDP) was released an hour before Friday’s market opening. That report showed GDP increasing at an annual rate of just 1.4%, half of the growth rate that had been expected. No doubt, much of the shortfall could be attributed to the government shutdown last fall. Nevertheless, stock indices opened lower that morning. Then, just a half-hour into the session, the U.S. Supreme Court (SCOTUS), in a split decision, ruled against the Trump administration’s International Emergency Economic Powers Act (IEEPA) tariffs.

In reaction to that announcement, SPX and COMP both shot up to near their highs of the week in the following five minutes with stocks in the consumer discretionary sector leading the climb. Both indices gave back a big chunk of those gains over the next couple hours but got a reprieve early that afternoon. During President Trump’s news conference in response to the SCOTUS decision, he announced that he could and would impose a 10% across-the-board tariff that would replace much of the lost IEEPA revenue (that proposed replacement tariff rate was bumped up to 15% on Saturday). Again, the indices spiked higher on the news; both SPX and COMP were able to print slightly higher new highs for the day before settling into the close.

Analysts are split on what impact the tariff news will have on earnings, inflation and interest rates. One big unknown is how permanent the new tariffs will be. We know the new tariffs are good for five months, but they require “investigations” for each country for them to be extended beyond that term. Experts expect those investigations will take much longer than five months. The immediate reaction of some authorities was that the potential recovery of the $133 billion in IEEPA tariffs paid would be a significant boost to profits and liquidity. However, the prevailing opinion is that any such recovery will take a long time and will likely recover just a small portion, if any, of the tariffs paid.

COMP was the big winner for the week, gaining 1.51%, but it’s still the big loser YTD, down 1.53%. SPX netted a little over 1% for the week and is now up a little less than 1% YTD. The Dow Jones Industrial Average (DJIA) added a mere 0.25% for the week, but thanks to big gains in several of its component stocks, that index is showing a YTD gain of more than 3%. Caterpillar, Inc., Honeywell International, Inc., Verizon Communications, Inc. and Chevron Corp. all have YTD gains of more than 20%. The Russell 2000 Index of small-cap stocks (RUT) has had the biggest zero-to-hero personality shift. Six months ago, it was the worst index performer in 2025. That all changed late last year and continued into 2026. Last week RUT gained 0.63% and is now up 7.5% YTD.

The market’s schizophrenia was recently the subject of an article by research firm Bespoke Investment Group. Per that report, “The gap between the three best-performing sectors over six weeks and the three worst has rarely been bigger, and usually during some sort of panic. At least in data back to the mid-1990s, it’s highly unusual that sectors should diverge so much yet the index stay so stable. The last time the sectors diverged so much was just before Silicon Valley Bank’s collapse prompted a global banking panic and federal rescues. Before that was the rebound from the first lockdown low. And before that was during the global financial crisis of 2008-09 (earlier the dot-com bubble and its aftermath saw a series of bigger sector swings).”

Based on the S&P industry sector SPDRs, the three best-performing sectors are energy, materials and industrials, with YTD gains of 22.75%, 16.78% and 14.25%, respectively. The energy sector has been the beneficiary of an uptrend in crude oil prices. Crude, which was trading in the mid-$50s per barrel in mid-January, has climbed into the mid-$60s in February. The three worst-performing sectors YTD are consumer discretionary, technology and financials, with losses of 1.64%, 2.15% and 4.16%, respectively.

As the current fourth-quarter earnings season winds down, there’s been good consistency in the reported improvements in revenues and earnings, but there’s been a huge discrepancy in how the stock prices responded to their earnings reports. It looks like overall earnings through the fourth quarter will show about a 12% year-over-year improvement. That’s several percentage points better than had been expected. Despite the higher earnings, SPX and COMP are not appreciably higher. SPX is currently at roughly the same level as its late-October high. COMP is about 3.5% below its high. Note that behemoth, NVIDIA, the last of the mega-cap stocks to report, will announce earnings on Wednesday.

One other unusual characteristic of recent market action has been the random spasms of “AI-impact realization” that have rocked specific subsectors. The realizations have been on the order of, “OMG! Think about how AI is going to replace or at least significantly impact the leading companies in ____ industry.” The result has been essentially targeted attacks on the AI-impacted subsector du jour. One day it was real estate companies. Insurance companies were the victim on another day. The software company stocks have been the most significant and the most consistent whipping post. The S&P North American Expanded Technology Software Index was already about 10% off its October high by the end of 2025. It’s down another 23% YTD as AI agents have become more proficient at writing code. Ten software company stocks have losses of more than 20% YTD. Five of them have lost more than 30%, with one, Intuit, Inc., off more than 42%.

SPX has been stuck in a range between 6780 and 7000 for nearly three months. The lows on last Tuesday morning were the fourth time the index has successfully tested the 6780 level in the past two months. Watch for sustained trading below that level as the first sign of trouble. As long as the index can hold above that level, higher highs are within reach. Two potential early tells could be the price action in the energy and materials sectors. Some retracement of the recent gains in both sectors is likely, but too much retracement could lead to SPX breaking that support level.

The Producer Price Index data on Friday will likely be the most significant economic report this week. One other potential market mover will be the State of the Union address Tuesday evening.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market