Weekly Investment Update (02/20/2026)

In a long-anticipated decision, the Supreme Court ruled 6-3 that President Trump’s use of the International Emergency Economic Powers Act (IEEPA) to enact reciprocal and fentanyl-related tariffs was unlawful; however, it stopped short of addressing whether importers are entitled to refunds. This decision will be left to lower courts and may take years to resolve. In response, President Trump announced a 10% global tariff under Section 122 of the Trade Act of 1974. The provision allows the president to impose tariffs unilaterally but limits the rate to 15% for 150 days before congressional action is required. Importantly, while this may create some headline volatility around future trade policy, the ruling is a net positive for markets and does not change our outlook for the U.S. economy or markets this year.

Fourth-quarter data confirmed that growth cooled late last year. The initial Q4 GDP reading came in softer than expected, and December inflation measures ticked modestly higher, reinforcing the sense that the economy lost some momentum into year-end. But much of that information is backward looking. Markets have largely absorbed the slowdown narrative, and Fed expectations remain anchored around a midyear rate cut.

More importantly, forward-looking indicators are beginning to point in a different direction. Manufacturing surveys improved in February, with the Philadelphia Fed and Empire State indexes both remaining in expansion territory and future business conditions rising. Industrial production and core capital goods shipments surprised to the upside, and housing starts rebounded to their highest levels in several months. Durable goods data showed strength in business equipment, and jobless claims came in lower than expected, suggesting labor conditions are stabilizing rather than deteriorating.

This mix of improving cyclical data supports a market that continues to broaden. While headline indexes have faced pressure from large technology names, performance beneath the surface has rotated steadily into industrials, financials, energy, and international equities. The equal-weighted S&P 500 has outperformed its cap-weighted counterpart, and global flows into Europe and Japan have accelerated. In our view, this orderly rotation reflects investors positioning for a more balanced expansion rather than a downturn. As growth reaccelerates from late-2025 softness, leadership is likely to extend beyond a narrow group of mega-cap stocks, reinforcing the case for diversified exposure.

Volatile Moves Present Investment Opportunities Against a Constructive Growth Backdrop

What is happening: So far in 2026, global equity returns are positive, outperforming fixed income, and international equities are outperforming U.S. equities. While this sounds similar to last year, under the surface there is a meaningful rotation among sectors and individual companies. AI disruption and value compression are driving underperformance in U.S. equities, with growth-oriented sectors such as information technology, communication services, and consumer discretionary the key underperformers.

Uncertainty around AI disruption is likely to persist as AI demand-driven growth is on a structural, multiyear path. But there are other macro themes worth considering. First is the ongoing Fed cutting cycle, with three rate cuts last year and two more cuts expected by year end. This translates to ongoing tailwinds for rate-sensitive equities, or those with higher correlation to short-term yields, such as small caps, homebuilders, and biotech, all of which have been outperforming since the Fed restarted its cut cycle.

Stronger growth expectations are driving performance in cyclicals, such as industrials. GDP consensus projections for 2026 have been revised higher since the start of the year, from 2.0% to 2.5%, while leading indicators like ISM and activity data, such as this week’s durable goods orders and industrial production, suggest stronger-than-expected growth in the coming quarters.

There has also been a defensive rotation to staples, utilities, and energy, partly driven by the AI disruption news as well as higher oil prices on geopolitical risk in Iran. Gold also remains a top performer, driving returns in materials and in exposed regions, such as Canada.

Finally, U.S. equity performance is so far in line with historical patterns experienced in midterm election years. Those years tend to see weaker, albeit still positive, returns for the S&P 500, while cyclicals — such as small caps and industrials — outperform in the first half before fading in the second half as administrations push for growth-oriented policy ahead of elections.

Why it matters: Market dispersion presents investment opportunities, and to identify those, we focus on fundamentals and where we see improvement, particularly relative to market expectations. Despite U.S. underperformance, earnings momentum has persisted. By sector, technology ranks at the top for earnings growth year-to-date, so its underperformance rests solely on multiple compression. This dynamic should alleviate concerns around a tech bubble burst, as negative earnings revisions and significant multiple expansion relative to other sectors historically have been key warning signs. U.S. technology now trades at a similar multiple to consumer staples. We also find it encouraging that earnings momentum is increasing for small caps while other rate-sensitive sectors continue to rank poorly.

We believe a constructive policy backdrop (Fed rate cuts and a positive fiscal impulse from tax refunds and corporate tax incentives), growth tailwinds, and structural tech earnings momentum limit the risk of a tech-driven market downturn and make cyclicals relatively attractive to defensives. Strong nominal U.S. growth not only underpins a rebound in U.S. equities but provides room for diversification toward more cyclical and value-driven regions. In our portfolios, we remain overweight equities overall with a tilt to the U.S. and have reduced active weights to hyper-scalers.

Shutdown-Delayed Data Point to a Tentative Rebound in U.S. Homebuilding

What is happening: Economic data delayed by last year’s federal government shutdown are still filtering out of Washington. This week, the Commerce Department released housing data for November and December. The delayed numbers suggest that some of the pressures weighing on the home-building sector began to subside toward the end of 2025.

Housing starts, a measure of new residential construction, rose in the final two months of the year. In December, they increased 6.2% to an annualized rate of 1.4 million homes, comfortably exceeding economists’ expectations of 1.31 million. Activity remained weaker than year-earlier levels, with December’s starts down 7.3% from a year earlier. Building permits, a forward-looking gauge of construction, told a similarly mixed story. Permits rose 4.3% in December to 1.45 million, above expectations of 1.4 million, though November’s figure showed a 1.6% monthly decline, underscoring that, while sentiment and activity are improving, the recovery remains uneven.

Why it matters: The housing data arrive at a key moment for the White House. With the State of the Union address due on February 24, and housing high on the agenda, President Trump is expected to unveil a fresh set of proposals aimed at housing affordability. Trump has repeatedly argued that bringing down home prices and widening access to homeownership will require more building, particularly of entry-level properties.

Congress is also beginning to act, with the House and Senate each recently passing their first major housing bills in decades, aimed at easing America’s housing shortage by encouraging more home building. The Senate’s proposal would look to apply pressure on cities that lag in home building, potentially redirecting portions of their federal funding to faster-building peers. Both chambers are also seeking to expand manufactured and modular home construction, which can be produced more quickly and cheaply than traditional builds. Additionally, the legislation targets mortgage access, raising loan limits for manufactured homes and pushing federal agencies to expand lending for mortgages below $150,000, which many lenders currently avoid because they are less profitable. These measures would help first-time buyers and lower-income households get onto the housing ladder.

Housing costs represent around a third of the Consumer Price Index inflation basket. If federal policy can meaningfully boost construction of entry-level and manufactured homes and ease supply constraints over time, this would help ease rent and shelter inflation. This would, in turn, support a lower-for-longer interest policy rate path, putting downward pressure on short-term interest rates. Bessemer portfolios maintain a slightly longer-than-benchmark duration positioning and would therefore benefit from these trends. Further detail on the housing market and its policy implications can be found in our recently published piece, Housing Market Fundamentals and Policy Implications.