February Market Update: What the Supreme Court Tariff Decision, AI Shifts, and Middle East Tensions Mean for Your Portfolio
February served as a reminder that markets rarely move in one direction for long. After a strong start to the year, sentiment shifted due to a major Supreme Court ruling on tariffs, worries about artificial intelligence (AI), and rising tensions in the Middle East. Despite this, international stocks (shares of companies outside the U.S.) and small-cap stocks (shares of smaller companies) continued to do well, and bonds (loans made to governments or companies that pay back interest) also gained. This highlights why holding a mix of different investments is so important.
While news headlines can cause short-term market swings, the overall economy remains in good shape and company profits continue to grow. Investors are best served by staying the course with a diversified portfolio — one that spreads investments across different types of assets — aligned with their long-term financial goals.
Key Market and Economic Highlights for February
- The S&P 500 fell -0.9% and the Nasdaq Composite dropped -3.4% for the month. The Dow Jones Industrial Average rose 0.2%.
- The CBOE VIX volatility index — a measure of how much market swings are expected — rose to 19.9 at month-end due to AI concerns and trade policy uncertainty.
- International developed markets jumped 4.5% (MSCI EAFE Index in U.S. dollar terms), while emerging markets gained 5.4% (MSCI EM Index). Year-to-date, they have gained 9.9% and 14.6%, respectively.
- U.S. small cap stocks gained 0.7% based on the Russell 2000.
- The 10-year Treasury yield — the interest rate on U.S. government bonds — fell to 3.95%, the first time below 4% since last November. The Bloomberg Aggregate Bond Index rose 1.6%.
- Gold closed lower at $5,279 per ounce but reached as low as $4,661 at the beginning of the month. Silver ended lower at $93.79 per month.
- The U.S. dollar index rose slightly to 97.6.
- January inflation showed headline CPI at 2.4% year-over-year and core CPI at 2.5%, while the core PCE price index rose 0.4% month-over-month, the sharpest increase in a year.
- The unemployment rate edged down to 4.3% in January, with 130,000 jobs added. However, annual revisions showed the economy created only 181,000 jobs in all of 2025, roughly 15,000 per month.
- On February 20, the Supreme Court ruled against the administration’s use of IEEPA-based reciprocal tariffs, prompting a shift to alternative trade laws.
- On February 28, the U.S. and Israel launched military strikes against Iran, including the compound of Iran’s Supreme Leader who has been reported killed.
The Supreme Court Ruling Changed How Tariffs Are Applied
The biggest policy event in February was the Supreme Court’s ruling on February 20 against tariffs that were put in place using the International Emergency Economic Powers Act (IEEPA). Tariffs are charges placed on imported goods from other countries. The Court’s decision could mean refunds for some businesses and consumers who paid these tariffs.
After the ruling, the White House quickly shifted to using a different law — Section 122 of the Trade Act of 1974 — which allows tariffs of up to 15% for 150 days. These new import charges took effect on February 24. While the legal basis for tariffs has changed, the overall direction of trade policy has not. Trade-related uncertainty is likely to keep generating market headlines, though history shows that markets tend to adapt over time as companies adjust their strategies.
Ai Excitement Meets Valuation Concerns
AI remained a major topic in February, but the conversation shifted. Some investors began worrying that AI could hurt the profits of software companies and disrupt traditional business models faster than expected. This led many to move money away from large technology stocks and into sectors seen as harder to replace, such as energy, materials, and industrials. This shift helps explain why the Nasdaq — which is heavily weighted toward technology companies — fell, while other parts of the market rose.
On the economic front, real GDP (the total value of goods and services produced, adjusted for inflation) grew at an annual rate of 1.4% in the fourth quarter of 2025, down from 4.4% the prior quarter. For all of 2025, real GDP grew 2.2%, which is still healthy. However, job creation was much weaker than expected, with only about 15,000 jobs added per month on average in 2025. This gap between economic growth and job creation has raised questions about the strength of the current expansion.
International Stocks And Small Caps Outperformed
One of the most encouraging trends in February was the strong performance of investments beyond large U.S. technology stocks. International developed markets rose nearly 5% and emerging markets gained over 5%. U.S. small cap stocks were also up, with the Russell 2000 surging roughly 5% year-to-date, well ahead of the S&P 500. This broadening of returns is a positive sign for investors who hold a diversified mix of assets.
Precious metals also performed well earlier in the period, with gold and silver gaining 6.8% and 8.1%, respectively, though both ended the month lower. These gains reflected geopolitical uncertainty and concerns about government spending. Meanwhile, escalating U.S.-Iran tensions and reports surrounding the death of Iran’s supreme leader, Ali Khamenei, added to market uncertainty. History shows that staying invested through periods of geopolitical stress has generally been the best approach.
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