Observations

Financial Markets Review

Financial markets entered February with a backdrop that, at least on the surface, appeared relatively stable. Major U.S. indices moved modestly during the month, but the headline figures masked a market environment defined by sharp dispersion beneath the surface. The S&P 500 declined 0.87% during the month while the Nasdaq Composite fell 3.38%, marking its weakest performance since the spring of 2025. By contrast, the Dow Jones Industrial Average managed a slight gain of 0.17%, while the Russell 2000 rose 0.71%. Perhaps more telling was the performance of the equal-weighted S&P 500, which gained roughly 3.5% and outperformed the cap-weighted index for the fourth consecutive month.

Such divergence illustrates the increasingly bifurcated nature of the equity market. While major indices have remained relatively close to their highs, individual stocks have experienced far wider swings. According to data cited by the Wall Street Journal, the average company within the S&P 500 has traded within a price band roughly seven times wider than the index itself so far this year. In other words, while the index has appeared calm on the surface, beneath that calm lies a market characterized by significant stock-level volatility. As Jordan Watson pointed out in the February 17^th edition of Notes from the Trading Desk, over just an eight-session stretch in February, more than 100 S&P 500 constituents experienced single-day declines of 7% or more—an extraordinary statistic considering the average drawdown when that happens is 34% and the index today remains only modestly below its all-time high.

Source: The Compound Media, data via Bloomberg Finance, L.P.

Technology stocks, particularly software companies, were at the center of this turbulence. However, with the near-daily drumbeat of headlines about new capabilities in AI models, many other industries were not spared. Insurance brokers, wealth management, commercial real estate, cybersecurity and transportation companies all took it on the chin at one point. Concerns surrounding artificial intelligence—ironically the same theme that propelled markets higher throughout 2024 and much of 2025—began to shift from excitement to scrutiny. A widely circulated research note from Citrini Research warned that rapid AI adoption could lead to significant white-collar job displacement, weaker consumer demand, and stress within private credit markets tied to leveraged software companies. The result was a swift repricing across the sector. At one point early in the month, roughly $220 billion of market capitalization evaporated from software stocks in a matter of days. Yet the broader market response did not resemble a classic “risk-off” environment. Instead, capital rotated toward more economically sensitive sectors. Industrials, financials, and energy companies generally performed better than their technology counterparts as investors embraced the narrative of a resilient U.S. economy.

The fourth-quarter earnings season also reinforced the underlying strength of corporate America. With nearly all S&P 500 companies having reported results by the end of February, earnings growth for the quarter stood at approximately 14% year over year—marking the fifth consecutive quarter of double-digit profit expansion. Importantly, those results significantly exceeded the roughly 8% growth analysts expected at the start of the reporting period.

Geopolitics also began to creep into the narrative as February progressed. Tensions between the United States and Iran escalated steadily throughout the month as diplomatic negotiations over Tehran’s nuclear program stalled. Energy markets responded accordingly, with crude prices drifting higher amid fears that a broader regional conflict could disrupt production across the Persian Gulf. At the time, however, most investors viewed the developments as a manageable risk rather than an imminent crisis.

As it turns out, February now feels like a distant memory. The first two weeks of March have delivered a dramatic shift in the market narrative. The most consequential development has been the rapid escalation of the conflict between the United States, Israel, and Iran. Following a series of coordinated strikes targeting Iranian nuclear and energy infrastructure, Tehran responded with attacks on U.S. bases and regional oil facilities. The situation intensified further when Iran’s supreme leader was killed in the initial wave of strikes, triggering widespread retaliation across the region.

Governments have attempted to stabilize the situation through coordinated responses. As crude oil tops $100/barrel for the first time since 2022, countries within the International Energy Agency announced plans to release roughly 400 million barrels from strategic petroleum reserves. Thus far, however, these measures have had limited immediate impact on prices.

Meanwhile, financial markets have responded cautiously. Major U.S. indices have now declined for three consecutive weeks, while the Nasdaq has fallen in eight of the past nine weeks. Rising energy prices have complicated the inflation outlook and forced investors to reassess expectations for monetary policy. Prior to the outbreak of hostilities, market expectations were for roughly three quarter-point rate cuts in 2026. Those expectations have now shifted to at most one quarter-point rate cut for the remainder of the year as higher oil prices threaten to push inflation back upward.

Economic data released throughout early March has added further uncertainty. While surveys from the Institute for Supply Management showed continued expansion in both manufacturing and services activity, the February employment report delivered an unpleasant surprise. The U.S. economy lost approximately 92,000 jobs during the month, with revisions indicating that job growth had been far weaker in recent months than previously reported, while the unemployment rate ticked higher to 4.4%.

The combination of rising commodity prices and weakening employment has revived an uncomfortable economic concept that markets had largely avoided for decades: stagflation. While it remains far too early to conclude that the U.S. economy is entering such an environment, the recent developments highlight how quickly macroeconomic conditions can shift when geopolitical shocks intersect with an already complex inflation backdrop.

Tandem Strategy Update*

Financial markets rarely move in a straight line, and periods of volatility often create a gap between price and underlying fundamentals. As Benjamin Graham famously observed, “in the short run the market is a voting machine, but in the long run it is a weighing machine.” While the timing of when fundamentals ultimately assert themselves is unknowable, maintaining discipline around owning durable businesses—companies capable of consistently growing revenues, earnings, and cash flows—positions patient investors to benefit when the market eventually recognizes that strength.

Our investment strategies are built around this principle. In the Large Cap Core strategy, companies must pay and grow their dividends. In the Equity and Mid Cap Core strategies, dividends are not required, but when they are paid, they must grow. Over the past year, companies in Large Cap Core increased earnings and dividends by an average of 13.61% and 10.52%, respectively. Equity strategy holdings delivered earnings growth of 14.59% alongside dividend growth of 10.74%, while Mid Cap Core companies generated earnings and dividend growth of 11.55% and 11.14%. In other words, the businesses we own largely did what we expect them to do, even if the market did not consistently reward that progress through much of 2025 and into the first quarter of 2026.

Our approach remains fundamentally bottom-up. While headlines often center on the movement of the S&P 500, the index itself has little bearing on how we manage portfolios. At times, individual companies will experience far greater volatility than the broader market, and it is within that dispersion where opportunity tends to emerge. As noted earlier, single-stock volatility relative to the index is currently near historic levels. Rather than attempting to predict market tops or bottoms, our focus remains on the underlying businesses and acting when valuation and fundamentals diverge. Periods of elevated single-stock volatility often create opportunities to add to high-quality holdings or initiate new positions at more attractive prices, while trimming positions that have become overvalued or exiting companies that no longer meet our criteria. The table below highlights our most recent firm-wide transactions across all strategies.



Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.