2026 has already been a year replete with spicy news items, and February was no exception. Our update is longer than usual, as the events of the last month require a bit more exploration. The primary February headlines came from a newsletter regarding the future of artificial intelligence (AI) and then, on the final day of the month, the initiation of military strikes against Iran. Additionally, the Supreme Court struck down the initial tariff regime we’ve been grappling with for many months, but that event took a back seat to the AI and Iran events.
AI is coming: Is that good news, bad news, or both?
Mid-month, a smaller research firm called Citrini issued a thought piece on the possible economic and market impacts of AI. The authors did not intend for the article to be a forecast of what is likely to happen, but instead as a worst-case scenario analysis of everything that could happen as AI is fully implemented.
Citrini’s illustration covered rising unemployment, falling consumption, credit and mortgage market stress and deeper deficit issues – potentially causing a severe downturn in the equity markets. They also forecast this all to occur within the next 24 months. The article triggered empathic responses from many research firms pointing out the shortcomings in the analysis, but a wave of uncertainty shook the markets anyway.
The article cast doubt over many sectors of the market that are most vulnerable to AI (e.g. software). The markets were already rotating away from the massive tech growth story of the last several years and migrating toward more value-based sectors – and the Citrini article added momentum to that trend.
It is important to highlight that the authors closed with the statement: “We are certain some of these scenarios will not materialize.”
Citrini seemed to acknowledge that it is highly improbable that their “perfect storm” series of events will occur. However, we are fairly sure iterations of some scenarios will occur at some point, and that AI will disrupt many industries and job categories.
Over the longer term, the equity markets should benefit from higher profits and likely lower employee headcount as a result of AI deployment. If this comes to fruition, our nation will have to develop strategies for managing a climbing unemployment rate, which could easily entail higher corporate tax rates to help fund government support programs. It is always possible that AI will create as many jobs as it eliminates, which is a thesis endorsed by some, although the current concerns tilt toward more job destruction than creation.
New military strikes against Iran
As February closed, the U.S. (along with Israel) initiated new military strikes against Iran.
This incursion is in its very early days, and we do not exactly know the endpoint for U.S./Israeli leaders. Some analysts believe that a complete regime change will not be required. Instead, what’s next may be clearer negotiations regarding nuclear capabilities and overall citizen rights.
Oil supplies via the Strait of Hormuz have been almost completely disrupted, and the price of oil has risen roughly 15% (at the time of this writing). Approximately 20 million barrels of oil pass through the strait each day, so a long-term disruption could be expected to push oil prices meaningfully higher.
A longer-term disruption could easily push oil up to $100/barrel. This would also force inflation expectations higher, and challenge the hopes of lower rates in the U.S. The potential outcomes could include:
- A swift resolution and “back to normal” (as we’ve seen more of recently); or
- A prolonged conflict lasting many months, with extended uncertainty about the price of oil, the risk to inflation, and potential terrorist activities from Iran.
It’s important to remember that the U.S. is far less reliant on oil than in the past. The amount of oil needed to produce one unit of gross domestic product (GDP) in the U.S. has fallen by roughly 70% since 1980. Natural gas and renewables are now a significant portion of our energy usage. The U.S. is now a net exporter of crude oil, and our shale production can be increased quickly. It is reasonable to assume that if oil prices rise meaningfully higher, production will increase, which should stabilize or reduce prices.
In these very early days of the conflict, the U.S. capital markets are still processing the situation. As we write this update, U.S. equities are under selling pressure due to the uncertainty. We’re reminded of the long-term trends around these types of events: regional geopolitical (even military) skirmishes are typically not substantial enough to impact the global economic outlook, and, therefore, don’t typically have meaningful long-term impacts on the financial markets.
As we mentioned last month, a large-scale military conflict with Iran (or China) could be meaningful enough to bring turbulence to the global financial markets in the short-term – but should resolve over time. For the month of February, the equity markets absorbed the turbulent headlines quite well, with the S&P dropping very modestly for the month (roughly -.85%), taking year to date (YTD) returns to +.70%.
Within the U.S. stock market, the rotation away from tech names toward a broader basket of value-oriented companies has continued. This shift has created waves, with Nasdaq experiencing its worst month since early 2025.
February’s shift was largely triggered by AI anxiety, as fears that new AI capabilities could disrupt white-collar industries spread through the markets, from software stocks to alternative asset managers and even commercial real estate services. On a more positive note, last month’s performance was again defined more by a broad sector rotation rather than purely a risk-off environment. This was demonstrated by another month of outperformance by the equal-weight S&P 500, which has continued to outperform since October 2025 – a sign of healthy broadening within the market.
Economic challenges for the FOMC
The economy appears to be on stable footing, despite a negative surprise in the GDP report for the fourth quarter of 2025 (which was due to accounting anomalies). It’s broadly expected that we will see a rebound to above-average growth for the first quarter of 2026.
Beneath the surface, there are still issues with what appears to be very strong consumption concentrated in the wealthiest households (signaling the K-shaped consumption). Additionally, there are still issues in the labor market, with job creation (payrolls) well below normal levels (near zero). Savings rates for the average household are near the bottom end of what is a normal/healthy range.
Economists are grappling with an apparent disconnect between labor market conditions and overall economic growth. Perhaps due to AI, we appear to have entered an age where consumption and economic growth can remain healthy, with the business sector generating higher profits, but without creating meaningful job growth.
In the last few weeks, we began to see some positive early signs within the manufacturing sector, which indicate that overall activity is increasing – perhaps in a manner that could help with job creation later in the year.
Inflation remains elevated and could be exacerbated by the conflict with Iran (ex: higher oil prices). In February, the Supreme Court struck down the initial tariff package, but it is presumed that a replacement plan will be implemented soon with a similar average tariff rate in place (13-15%). Facing uncertainty around tariffs and the Iranian conflict, the Fed must remain “data dependent” and reactive to what they learn over coming months.
A new Fed chair has been named to take the helm in May, and they will need to consider numerous crosscurrents before they specify a clear path forward. The markets are expecting 1-2 more cuts to the overnight rate by year-end (down to 3.25%), but the story around inflation becomes more challenging by the day.
Outlook and summary
The U.S. economy appears to be on reasonable footing, while the labor market continues to face challenges. Economic growth continues to be driven primarily by the wealthiest households and AI-related corporations. The markets have shown incredible resilience in the face of ongoing uncertainties, but the fresh military conflict with Iran will bring a need for extreme vigilance.
Oil is likely headed toward even higher prices, and uncertainty will elevate. Inflation is still too high, and the Iranian conflict could send it higher, yet the FOMC believes it will taper off on its own in 2026. Monetary and fiscal stimulus should help broaden economic growth to a wider group of households as the year transpires. We have become a bit more optimistic that we are headed for more stable, sustainable economic growth as we move through 2026.
We are here to provide our clients with peace of mind about their financial future. Anchoring to a sound, long-term financial plan will help everyone weather economic storms like these. We will remain disciplined, and consistent in our strategies and philosophies. We are confident that together we will manage our way through this (hopefully brief) challenging time.
Eric Kelley serves as executive vice president, chief investment officer for UMB Private Wealth Management, as he analyzes economic uncertainty and stability with new challenges brought to the U.S.
