When It Rains, It Pours: Markets React to a Flood of News
People handle unexpected downpours differently—some dash for cover, others stroll slowly, and occasionally a few embrace the storm, splashing through puddles with delight. Last week, investors faced a similar mix of reactions as a torrent of news and data swept through the U.S. financial markets, creating a volatile trading environment. Here’s a snapshot of the key developments:
Strong corporate earnings persist.The Standard & Poor’s 500 (S&P 500) continued to impress, posting strong fourth-quarter results. The Index is on track for its fifth straight quarter of double-digit earnings growth. As of mid-February, the S&P 500’s blended year-over-year earnings growth stood at 13.2%, according to John Butters of FactSet.
Economic growth slowed by government shutdown.While companies performed well, the broader economy took a hit. The Commerce Department reported that gross domestic product (GDP) grew at an annualized rate of just 1.4%, below the Dow Jones estimate of 2.5%, largely due to the recent government shutdown, noted Jeff Cox of CNBC.
Inflation accelerated in December.Delayed reporting revealed that inflation picked up last month. The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure, showed signs of rising prices, highlighting ongoing inflationary pressures.
| Month | Headline inflation rate (PCE price index, year over year) | Core inflation rate (PCE price index, year over year, excluding food and energy prices) |
|---|---|---|
| December 2025 | 2.9% | 3.0% |
| November 2025 | 2.8% | 2.8% |
| October 2025 | 2.7% | 2.8% |
Source: Bureau of Economic Analysis
Ongoing uncertainty around AI.Investors continue to grapple with the economic implications of artificial intelligence. Questions about how AI will reshape business models and whether investments in AI will yield strong returns remain top of mind, as reported by Rita Nazareth of Bloomberg.
Supreme Court ruling impacts global tariffs.The Supreme Court struck down tariffs imposed by former President Donald Trump under the International Emergency Economic Powers Act. President Trump responded by announcing a new 10% global tariff, signaling continued trade tensions, according to Barron’s.
Despite a turbulent week, major U.S. stock indexes closed higher, while yields on most U.S. Treasury maturities rose.
| Data as of 02/20/2026 | 1-Week | Y-T-D | 1-Year | 3-Year | 5-Year | 10-Year |
| Standard & Poor’s 500 Index | 1.1% | 0.9% | 13.0% | 20.0% | 12.3% | 13.5% |
| Dow Jones Global ex-U.S. Index | 0.8 | 9.3 | 32.0 | 15.1 | 5.8 | 7.5 |
| 10-year Treasury Note (yield only) | 4.1 | N/A | 4.5 | 4.0 | 1.4 | 1.8 |
| Gold (per ounce) | 0.7 | 17.0 | 71.9 | 40.2 | 23.0 | 15.4 |
| Bloomberg Commodity Index | 2.0 | 9.1 | 11.1 | 3.8 | 6.7 | 4.7 |
S&P 500, Dow Jones Global ex-US, Gold, and Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested in directly. N/A means not applicable.
How Will the Fed’s Leadership Change Affect Monetary Policy?
The Federal Reserve plays a central role in keeping the U.S. financial system stable. In 2026, the Fed will experience a leadership change, as the current chair retires and former Governor Kevin Warsh is nominated as the next chair.
A fresh perspective on monetary policy.Mr. Warsh has long criticized certain Fed policies, particularly quantitative easing (QE). He has argued that QE encouraged Congress to spend more than it otherwise might. In an April 2025 lecture, Warsh noted:
“During the 2008 crisis, we cut interest rates to near zero and introduced new tools to provide liquidity to frozen markets. While I strongly supported these crisis measures, the Fed never fully reversed them afterward. QE has become nearly permanent, making it easier for fiscal policymakers to spend with subsidized financing costs.”
Potential approaches to balance sheet reduction.One of Warsh’s top priorities may be shrinking the Fed’s balance sheet. Bloomberg’s Alex Harris outlined several strategies:
Reducing Treasury purchases:The Fed could slow or halt purchases of Treasury bills, currently $40 billion per month, though restarting quantitative tightening is unlikely due to banking system constraints.
Adjusting regulations:Modifying bank reserve requirements or easing liquidity coverage ratios could reduce the impact of balance sheet shrinkage.
Asset swaps:Selling long-term Treasuries and purchasing shorter-term bills could help, though it may increase borrowing costs by 40–50 basis points and would require careful coordination with the Treasury.
Warsh supports closer coordination with the Treasury, which could smooth balance sheet reductions but may raise questions about the Fed’s independence.
Another key challenge for the Fed under Warsh will be navigating monetary policy in an economy increasingly influenced by AI—a topic we will explore in next week’s commentary.
Weekly Focus – Think About It
“Growth is never by mere chance; it is the result of forces working together.”
– James Cash Penney