Is It Time For The Market To Take A Break?

*Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

• DJIA 52-wk: +11.72% | YTD: +1.90% | Wkly: -1.31%
• S&P 500 52-wk: +15.52% | YTD: +0.49% | Wkly: -0.44%
• NASDAQ 52-wk: +20.27% | YTD: -2.47% | Wkly: -0.95%
• NVIDIA 52-wk: +41.84% | YTD: -4.99% | Wkly: -6.65%
• Russell 2000: Down ~ -1.65%

Broad weakness reflected growing risk-off sentiment and rotation out of higher-beta and growth names.

Figures as of Market Close 27th Feb 2026.

1) Inflation & Rate Expectations

Firmer-than-expected inflation data (e.g., hot PPI) resurfaced concerns that inflation remains persistent, pushing back expectations for Federal Reserve rate cuts and weighing on equities — especially tech stocks. Business Insider

2) AI Sector Pressure

• Nvidia, a bellwether for tech and AI valuations, extended its post-earnings decline, dragging the Nasdaq lower and reinforcing investor caution around AI-linked growth stocks. Barron’s

3) Geopolitical & Oil Price Moves

Rising oil prices amid stalled negotiations and heightened geopolitical tensions bolstered energy stocks but added uncertainty elsewhere, contributing to divergent sector performance. Investor.com

4) Stock-Specific Movers

• Block Inc. surged after announcing job cuts tied to AI adoption.
• Netflix rallied after abandoning its bid for Warner Bros. Discovery
• Dell jumped strongly on upbeat earnings forecasts.
  These individual moves offset some weakness but weren’t enough to lift overall markets. Yahoo News

Rotation & Risk Aversion

Investors shifted toward defensive and value-oriented sectors, while technology and growth names saw heavier selling pressure as traders reassessed valuations and earnings outlooks. Lpl Financial

Volatility & Caution

Market breadth was mixed, with small caps (Russell 2000) showing relative weakness alongside broader risk aversion. Defensive sectors like utilities and staples outperformed relative to tech and financials. Lpl Financial

End-of-Month Rebalancing

Portfolio rebalancing and month-end flows also influenced price action, as institutional investors positioned ahead of March and evaluated risk following key earnings and macro data. Reddit

Sector Highlights (Week Ending Feb 27)

Sector

Weekly Note

Energy

Held up well on rising oil prices. Lpl Financial

Utilities, Staples

Defensive sectors showed relative strength. Lpl Financial

Technology

Weakened as AI concerns and inflation fears persisted. Lpl Financial

Financials

Underperformed amid macro caution. Lpl Financial

Summary

The week of Feb 23–27, 2026 was marked by a broad market pullback, with major indexes finishing lower as macro concerns (inflation and growth expectations), tech sector volatility, and geopolitical risks weighed on sentiment. Individual earnings stories and stock-specific catalysts created pockets of divergent performance, but the overall bias was cautious to negative by week’s end.

NVDA -4.16% problem.

Anyone who read the chip maker’s earnings might assume the market would rise. Nvidia beat earnings forecasts, is seeing fast growth for its high-margin data-center chips, and even guided for $78 billion in first-quarter sales—$5 billion above expectations. The stock, however, dropped 9% for the last two days of this week, helping to lead the market lower.

The Dow Jones Industrial Average DJIA-1.05% is down 1.6% for the week, and was on pace for its worst week since late November, while the Nasdaq Composite 

COMP-0.92% fell 1.3% and the S&P 500 index SPX-0.43% declined 0.8%.

“The [AI] trade has gotten stretched,” says Kenny Polcari, veteran trader and chief market strategist at SlateStone Wealth.

If only the market didn’t have other things to worry about. Private-credit fears have hit financial stocks. January’s producer price index revealed hotter-than-expected cost inflation. A U.S. attack on Iran could be in the works. And the administration is increasing base tariffs on imports moving into the U.S.

But ultimately it comes back to earnings, especially profit margins. While nothing in Nvidia’s earnings call pointed to slowing data-center growth—one of the market’s greatest fears—its 75% full-year gross margin guidance beat estimates by only a few tenths of a percentage point.

And it’s not just Nvidia whose margins could be peaking—or even coming under pressure. Aggregate reported gross margins for S&P 500 companies—excluding financials and real estate companies—recently dropped to roughly 45% from a multidecade peak of over 47% in 2021, according to Trivariate Research. Gross margins are important because they’re a key indicator of a company’s future earnings. Lower ones indicate each product or service it offers is inherently less profitable and is often consistent with waning demand and growth, even if net margins, which companies can boost through cost cutting, suggest everything is fine.

There’s a direct link between margins and valuations. Price/earnings multiples are largely higher for companies with fatter gross margins, Trivariate’s data show, so disappointments on margins would reduce multiples—and cause individual stocks to fall.

The result: The S&P 500 has gone nowhere for the past two months. To Frank Cappelleri, market technician and founder of CappThesis, the selling suggests a market that looks “toppy.” Unless something changes for the better, selloffs could resurface when the index hits 7000, putting a “potential bearish pattern” in play.

No bell has rung just yet. The S&P 500 is still holding key support between 6750 and 6800, Cappelleri says. But anything below that level opens the door to an even larger drop. Beyond that, the next key level to watch would be 6538, where buyers stepped in after a decline in late November. That’s about 5% below the current level. By contrast, the iShares MSCI ACWI ex US ACWX -0.24% exchange-traded fund, which holds non-U.S. stocks, rose 0.4% this past week.

Stocks have little margin for error now—and the problem might be us.

UBS has downgraded U.S. equities to benchmark in a fully invested global portfolio, citing stretched valuations, fading buyback support, and rising risks from a weaker dollar, while reiterating a high-conviction overweight on emerging markets.

The bank said the United States has the lowest operational leverage among major regions and historically underperforms when global growth accelerates above 3.5%. UBS now forecasts global GDP growth of 3.4% in 2026, up from 2.7% previously, arguing that a broadening recovery could favor more cyclical markets.

The bank also warned that a weaker dollar may weigh on unhedged U.S. returns, noting that currency losses have recently outweighed the earnings uplift typically associated with dollar depreciation. Meanwhile, U.S. buyback yields are now broadly in line with global peers, reducing a key pillar of support for earnings per share and valuations.

UBS flagged that sector-adjusted price-to-earnings ratios in the U.S. stand about 35% above peers, well above long-term norms.

By contrast, emerging markets are seen as benefiting from accelerating global growth, cheaper valuations, and potential dollar weakness. UBS said EM equities offer higher operational leverage, supportive currency dynamics, and improving earnings breadth, reinforcing its overweight stance.

Is “AI Disruption Risk” Starting to Show Up in the Stock Market?

It did not seem like a major news story at first glance. The AI research lab, Anthropic, announced updates to its Claude platform, including expanded “agent” capabilities. The demonstration signaled to markets that AI tools could increasingly serve as a kind of centralized interface for knowledge work. It could automate coding, legal review, and even operational workflows at a high level of sophistication.

Generally speaking, it’s what we’d expect in the next phase of AI development. But then came the sharp slide in software stocks.1

What was once seen as a tool to supercharge productivity and product development suddenly became a disruption risk. Investors who were previously underwriting 15–20% medium-term revenue growth for many key names in the software space were now pricing many of these same companies closer to 5–10%. The question is, what exactly has changed?

In many cases, the answer was not projected 2026 earnings. Though the headline risk gripped the markets, there was no broad deterioration in reported revenue, cash flows, or operating margins. Importantly, earnings guidance also did not signal structural impairment across the industry.

In my view, what changed seemingly overnight was sentiment - specifically, long-dated assumptions about how AI may reshape competitive dynamics over time. It is fair to say that over the past two years, software valuations expanded meaningfully as investors assumed AI would accelerate growth, improve productivity, and entrench market leaders. Multiples reflected those expectations. But now we’re seeing the reverse, where the fear is that AI will commoditize certain software layers, compress pricing power, and erode moats.

What stands out to me is how much of this debate is rooted in forecasting scenarios that may or may not unfold years from now. There is a great deal of modeling the future, but very little concrete financial evidence, at least at this stage, that these risks are showing up in reported results.

To be sure, markets constantly discount the future. That’s what we expect markets to do. But when expectations swing rapidly based on hypothetical scenarios that may unfold years from now, valuations can detach from current fundamentals, in both directions. I think that’s what we saw in software stocks earlier in the month.

Risk disruption is real in technology, but we want to identify it in financial statements, not by making wagers. A focus on earnings when selecting companies for a portfolio will unearth early signs of decelerating revenue growth, shrinking margins, falling retention rates, and weaker free cash flow. Today, we are not broadly seeing that, but I certainly am not ruling out the possibility that we will sometime in the future.

Instead, we are seeing investors rapidly adjusting the terminal growth assumptions embedded in valuation models. When you move an implied growth rate from 15–20% down to 5–10%, the math alone can justify a sharp decline in stock prices, even if near-term earnings remain intact. This does not mean the market is wrong, but I do think it means the market is repricing uncertainty. To me, that’s a sentiment trade, not a fundamental trade.

This market ‘event’ should also serve as a reminder to investors of why diversification is so important, which is a theme I continually revisit in this column.

In 2026, we are seeing signs of market broadening, with small-cap stocks showing relative strength, cyclical sectors outperforming again, and capital generally rotating into areas that were previously overshadowed by mega-cap technology leadership. When portfolios are properly diversified across sectors, market caps, and styles, investors participate in those shifts rather than being overly exposed to any theme. The software selloff becomes less of a major story and more of a contained episode within a broader market that continues to find strength in other areas.

Bottom Line for Investors

AI disruption risk is real, full stop. But it should be evaluated through earnings and cash flow, not solely through changes in sentiment. In my view, the recent selloff in software stocks appears to be driven more by shifting long-term assumptions than by collapsing fundamentals.

1. Market Breadth (Very Important)

After a pullback week, the key question is:

Does breadth confirm weakness — or stabilize?

Watch:

• NYSE & NASDAQ A/D line.
• % of stocks above 20-day and 50-day moving averages.
• New highs vs. new lows.

If breadth deteriorates while indexes hold up → that’s distribution.
If breadth improves on up days → dip buyers still in control.

2. Follow-Through or Failed Bounce?

After a down week, markets usually:

• Attempt an early-week bounce.
• Then reveal real intent midweek.

Watch:

• Is the bounce on strong volume?
• Do leaders participate?
• Do small caps (Russell 2000) confirm?

Weak bounce + heavy selling = caution.

3. Oil & Geopolitics

Given the Iran tensions:

• Does crude oil continue higher?
• Do energy stocks lead?
• Or does risk premium fade quickly?

If oil spikes aggressively → inflation fears resurface → pressure on tech.

If oil stabilizes → markets can refocus on earnings and liquidity.

The 10-Year Treasury is critical.

• Rising yields → pressure on growth stocks.
• Falling yields → relief rally potential.

If yields break higher while stocks struggle, volatility could expand.

Are leaders holding?

Check:

• Mega-cap tech
• Semiconductors
• Financials
• Industrials

If prior leaders break down, that’s a warning sign.

If new sectors rotate up (energy, healthcare, staples), that’s defensive positioning.

7. Volatility (VIX)

Does VIX:

• Stay elevated?
• Fade quickly?
• Or spike above recent highs?

Sustained elevated volatility = distribution environment.

Big Picture Question

The market has been:

• Buying dips
• Using up capital
• Riding strong breadth

Now ask:

Are buyers still aggressive?
Or are we transitioning from accumulation to consolidation/distribution?

It’s time to re-evaluate the near-term direction of the stock market. Investors have been buying dips for many weeks, initiating new positions and adding them to existing ones — either by averaging down or up — and deploying a considerable amount of capital in the process. At the same time, escalating geopolitical tensions, including recent airstrikes and retaliatory attacks between the United States/Israel and Iran, have introduced a renewed risk premium into markets and driven volatility in oil and energy prices, which can affect investor sentiment and macro positioning. Given the combination of stretched positioning and heightened uncertainty, a prudent approach may be to adopt a wait-and-see attitude going forward.

– Richie

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