Will The Rotation Continue?

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

• DJIA 52-wk: +14.27% | YTD: +3.25% | Wkly: +0.25%
• S&P 500 52-wk: +14.91% | YTD: +0.94% | Wkly: +1.07%
• NASDAQ 52-wk: +17.22% | YTD: -1.53% | Wkly: +1.51%
• iShares MSCI ACWI ex US ETF 50-WK: +32.62% | YTD: +10.41% | Wkly: +1.19%
• Russell 2000 (Small Caps): Nearly Flat To Slightly Positive (~+0.1%)

Friday’s session helped cap the week with positive returns after a volatile start.

Supreme Court Tariff Ruling

The biggest market catalyst was the U.S. Supreme Court striking down broad tariffs imposed under emergency powers - a decision that sparked relief buying, particularly in retail and consumer discretionary names. Investopedia

• Retail & apparel stocks (e.g., Lululemon) saw notable gains. NY Post
• Tech and e-commerce (Amazon, Etsy, Wayfair, Alphabet) rebounded as tariff uncertainty eased. Motley Fool

The ruling lifted sentiment and helped reverse mid-week selling, especially in broader equity markets. Yahoo Finance

Volatility & Economic Data

• Markets started the week with mixed sentiment, influenced by lingering uncertainty around AI-related spending and valuation “repricing” in growth sectors. Bloomberg
• GDP growth for Q4 was lower than expected, though markets largely shrugged it off later in the week. 24/7
• Treasury yields held steady, and the dollar retreated on optimism from the tariff ruling. AP
  
  

Sector & Stock Notes

Sector Rotation Trends:

• Communication Services & Consumer Discretionary led gains as optimistic positioning returned. LPL Financial
• Energy & Industrials were modestly positive for the week. LPL Financial
• Utilities, Consumer Staples, Health Care lagged. LPL Financial
  
  

Individual Movers:

• E-commerce and retail stocks surged on tariff news. Yahoo Finance
• Tech names generally rebounded toward the end of the week. Yahoo Finance
  
  

Market Themes

1. Policy & Legal Impact The tariff decision was a major catalyst, reversing prior risk-off behavior and supporting broad market gains.

2. Valuation Repricing’s investors continued to assess longer-term growth assumptions—particularly around AI and high-multiple tech names—which had weighed on markets prior to the rebound.

3. Macro Signals Mixed economic data reminded traders that while tariff risks eased, fundamental indicators like GDP and inflation still matter for rate expectations and valuations.

Volatility Metrics (VIX):
The VIX index is a real-time sentiment gauge:

• Rising VIX → increased fear, defensive positioning
• Falling VIX → risk appetite returns

Volatility changes often precede price moves.

Economic rhythms can change in ways that surprise the consensus. Entering early 2026, most investors were optimistic, with stocks entering their fourth year of this bull market at all-time highs.

Of course, markets have a way of surprising the masses. Former tech leaders have exhibited a classic risk-off posture—characterized by rotation out of high-growth stocks into more defensive sectors like consumer staples and utilities.

The first two months of this year served as a stark reminder of how quickly investor sentiment can shift. Tech-heavy indices have underperformed, with the widely followed Nasdaq 100 index falling this year amid concerns about the sustainability of AI spending and broader economic softening.

Why Investors Have Rotated to Safety

The reasons behind this rotation are multifaceted but logical. Technology, after years of dominance driven by AI hype and low-rate fueled growth, entered 2026 with elevated expectations. Concerns over skyrocketing AI investment and potential regulatory scrutiny prompted profit-taking.

Broader economic signals, including a weakening jobs market and geopolitical uncertainties, encouraged investors to seek stability. Consumer staples, with their predictable demand for essentials such as food, beverages, and household products, saw buying pressure, along with defensive utilities.

This shift echoes into historical patterns where, during periods of uncertainty or market broadening, capital flows from high-growth cyclicals to defensives. Staples became the go-to pocket of the market early this year, attracting record inflows as portfolios de-risked.

Yet, as we approach the March-April timeframe, historically a period of positive seasonality for equities, there's a compelling case that this sentiment could pivot back to risk-on. Factors like substantial tax refunds injecting liquidity into consumer pockets, combined with resilient earnings and moderating inflation, suggest tech's pause is just that - a breather before renewed momentum.

Let's explore why this risk-off phase may give way to risk-on, starting with the current earnings landscape.

From Risk-Off to Risk-On: Why Tech's Recent Downturn Is Just a Breather

Economic rhythms can change in ways that surprise the consensus. Entering early 2026, most investors were optimistic, with stocks entering their fourth year of this bull market at all-time highs.

Of course, markets have a way of surprising the masses. Former tech leaders have exhibited a classic risk-off posture - characterized by rotation out of high-growth stocks into more defensive sectors like consumer staples and utilities.

The first two months of this year served as a stark reminder of how quickly investor sentiment can shift. Tech-heavy indices have underperformed, with the widely followed Nasdaq 100 index falling this year amid concerns about the sustainability of AI spending and broader economic softening.

Why Investors Have Rotated to Safety

The reasons behind this rotation are multifaceted but logical. Technology, after years of dominance driven by AI hype and low-rate fueled growth, entered 2026 with elevated expectations. Concerns over skyrocketing AI investment and potential regulatory scrutiny prompted profit-taking.

Broader economic signals, including a weakening jobs market and geopolitical uncertainties, encouraged investors to seek stability. Consumer staples, with their predictable demand for essentials such as food, beverages, and household products, saw buying pressure, along with defensive utilities.

This shift echoes historical patterns where, during periods of uncertainty or market broadening, capital flows from high-growth cyclicals to defensives. Staples became the go-to pocket of the market early this year, attracting record inflows as portfolios de-risked.

Yet, as we approach the March-April timeframe, historically a period of positive seasonality for equities, there's a compelling case that this sentiment could pivot back to risk-on. Factors like substantial tax refunds injecting liquidity into consumer pockets, combined with resilient earnings and moderating inflation, suggest tech's pause is just that—a breather before renewed momentum.

Stocks rallied on Friday after the Supreme Court repudiated the signature pillar of President Donald Trump’s trade agenda, but the market’s relief is likely to be short-lived. Instead, investors should prepare for a new round of economic uncertainty.

In a 6-3 decision, the court said that Trump broke the law by using the International Emergency Economic Powers Act, or IEEPA, to place tariffs on most of America’s trading partners. While IEEPA allows the president to limit trade in many ways, the court said, it didn’t give the president tariff powers.

Behind almost every public statement and Truth Social post in which he threatened to bludgeon a trading partner, IEEPA was the power that Trump relied on. Now, that authority is gone. But rather than retreat, Trump is doubling down. After railing against the court, Trump announced on Friday afternoon that he would impose a new, 10% global tariff and foreshadowed more to come.

“Foreign countries that have been ripping us off for years are ecstatic,” Trump said. “They’re so happy, and they’re dancing in the streets, but they won’t be dancing for long.”

The same could be said of investors. After a volatile day of trading, the S&P 500 index ended the session up 0.7%, to 6909.51. Some tariff-sensitive stocks that initially soared when the decision was announced gave up some or all of their gains by the close.

The 10-year Treasury yield rose by a modest 0.01 percentage point to 4.09%.

No matter what Trump does, the tariff decision could have immediate implications for the economy and national debt. Even if the president reinstates most levies, the Treasury might have to refund what it has already collected. A $175 billion refund would benefit corporate margins and equate to a fiscal stimulus of about 0.6% of gross domestic product over coming quarters, according to 22V Research, although some of that will be eaten up by the tariffs that remain.

The Supreme Court offered no path for the refund process, which will probably be a logistical mess.

The White House has argued that the heavy tariffs are needed for national security reasons and to correct a decades-long trade imbalance resulting from what it says are other countries’ unfair trade practices. In 2025, the trade deficit stood at about $901.5 billion, slightly less than its level the previous year. Trump has also touted tariffs as a jobs creator for industries like steel and furniture-making, which have seen production fall sharply over the past few decades in favor of imported goods from countries including Japan and China.

Unlike other tariff authorities, which require investigations that can take months, IEEPA could be implemented immediately, the White House believed, giving Trump a powerful trade tool he could implement just months into his second term. It also gave Trump leverage as his trade advisers negotiated deals with other countries to widen markets for U.S. exporters in exchange for those countries seeing their own levies go down.

Trump and Congress were also counting on tariff revenue to help pay for last year’s massive package of tax cuts. If that revenue isn’t replaced, the ruling could add more than $2 trillion to the $38.7 trillion national debt over the next decade, according to the Committee for a Responsible Federal Budget.

Trump has several paths to reimpose levies quickly. A law to combat balance-of-trade deficits gives him the ability to impose tariffs of up to 15% for 150 days—the power he used on Friday. Other authorities meant to combat unfair trade practices or to protect national security are already being used to put heavy levies on imports from China and to protect industries deemed critical to national security, such as steel and aluminum. The Supreme Court decision affects none of those laws.

“Despite the misplaced gloating from Democrats, ill-informed media outlets, and the very people who gutted our industrial base, the Court did not rule against President Trump’s tariffs,” said Treasury Secretary Scott Bessent in a speech on Friday.

Using the other authorities “will result in virtually unchanged tariff revenue in 2026,” Bessent said.

Politically, Trump might not get as much backup from his own party as he does on other issues. Some GOP lawmakers on Friday issued equivocal statements suggesting that the court decision should compel Trump to defer more to Congress on trade policy.

Affordability has been a key weakness for Trump and Republicans ahead of the November midterm elections, with tariffs consistently ranking among the most unpopular of the president’s policies. Nearly two-thirds of Americans said they thought tariffs made everyday items less affordable, according to a January poll by the Council on Foreign Relations.

As Trump reimposes tariffs, “Democrats will seize on this and try to make it look like ‘Liberation Day 2.0,’ ” said Beacon Policy Advisors analyst Owen Tedford, alluding to the April 2025 tariff announcement that tanked markets worldwide.

The White House has two choices, says Henrietta Treyz, head of economic policy research at Veda Partners. “Take this gift the SCOTUS just gave them and keep the tariffs off to help curb inflation, or cycle into new and different tariff authorities that will once again increase compliance costs for importers, cause chaos and confusion at the border, and disrupt the harmonized tariff schedule.”

Some companies should get at least a short-term boost from potential IEEPA tariff refunds and a temporary reprieve as the old tariffs expire before new ones are put on. Among them are retailers and consumer-facing companies that have high import exposure, including Abercrombie & Fitch ANF+0.53%, Victoria’s Secret VSCO+4.96%, Gap GAP+1.95%, and Birkenstock Holding BIRK+1.16%, note Jefferies analysts. All four companies held on to their Friday morning gains. The State Street SPDR S&P Retail XRT+0.73% exchange-traded fund closed 0.7% higher.

Costco Wholesale, Kawasaki Motors, and Revlon, among other companies, have proactively filed claims with the Court of International Trade in a bid to receive IEEPA tariff refunds. Other companies hoping to follow in their footsteps will have to do the same, and it will take time for lower courts and Customs and Border Protection to sort those requests out, said Brett Johnson, a partner at Snell & Wilmer, a law firm.

Those refunds aren’t a given, either. Trump suggested in his news conference on Friday that the administration might decide to fight the refunds in court, a process that would take years.

The problem for investors and companies who hope the tariff battle is over is simple: Trump loves tariffs—often going so far as to say in speeches that “tariff” is among his favorite words. One adverse court ruling won’t change that.

NVIDIA’s next scheduled earnings report is on:

📅 Wednesday, February 25, 2026 🕔 After the market closes — this is the confirmed date for their Q4 Fiscal 2026 earnings release.

What’s Expected

• Analysts forecast strong results: EPS estimates around $1.50+ and revenue near $65 billion — both up sharply year-over-year.

Earnings & Forward Guidance

Next week continues earnings season, with companies across sectors reporting. Pay attention to:

• Retailers commenting on consumer demand post-tariff ruling
• Tech earnings and guidance — especially if they revise forecasts lower/higher
• Banks & financials for credit quality commentary

Earnings can spark short-term volatility and rotation between sectors.

Why It Matters

Since Nvidia is a major driver of overall market sentiment — especially in AI and tech stocks — this earnings release tends to be a high-impact event for the Nasdaq and broader indexes.

The next Producer Price Index (PPI) release for U.S. economic data is scheduled for:

📅 Friday, February 27, 2026 🕣 8:30 a.m. ET — The January 2026 PPI data will be released by the U.S. Bureau of Labor Statistics (BLS).

This report provides the latest monthly measure of wholesale price inflation and is watched by markets as a leading indicator for consumer inflation trends and potential Fed policy impacts.

The NYSE cumulative A/D line made a new high on February 17th, underscoring strong market breadth.

On Friday, the NYSE recorded approximately 1,999 advancing stocks versus 732 decliners, while the NASDAQ showed about 3,129 advancing issues against 1,646 declining stocks.

Rotation appears to be broadening, and dip buying remains active. Given these factors, it’s difficult to take a bearish stance here.

– Richie

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