Fund Commentary & Market Outlook

March 1, 2026

Stocks Finish Lower As AI And Tariffs Spur Market Rotation

Of all the concerns that investors had last month, a war with Iran was the least among them. Of course, that changed Saturday morning February 28, so apart from oil prices, little in this report reflects that development. That said, oil prices did rise 2.4% in February. Winter weather across the continent was a likely factor in that rise, though it now appears that Saudi Arabia and others kept prices in check by front-loading the oil supply chain ahead of the U.S.-Israeli attack.

As for tariffs, well, we all know how that has so far played out. The cornerstone of President Trump’s economic policy was struck down by the Supreme Court, and one gets the feeling that his implementation of a global 15% tariff is but his first salvo in testing the limits of his now reined in executive power.

A less-discussed consequence of the high court’s ruling involves "reshoring." Tariff revenue was supposed to help address the federal deficit. But it was also meant to encourage overseas businesses to set up shop in the U.S. and generate jobs for Americans. Though there’s been much fanfare over the handful of companies that have agreed to do just that (including U.S. chip makers who are returning for national security reasons), the court’s ruling likely has CEOs rethinking any such moves — especially before November’s mid-term elections. Sooner or later, Congress will play its part.

With U.S. and foreign corporations again having to decide on what their supply chains should look like, and where they should deploy their capital, investors need to sit on their hands for a while until there’s greater clarity on trade, and another issue that matters even more: artificial intelligence.

With the technology sector accounting for a third of the S&P 500 and nearly half of the Nasdaq Composite, as go chipmakers like Nvidia and their primary customers (Microsoft, Amazon, Alphabet/Google and Meta/Facebook), so goes the market. And while their CapEx spending alone this year is forecast to account for nearly $700 billion of Nvidia’s sales, there’s considerable nervousness over Big Techs’ returns on investment, and just as important, which companies will find themselves on the losing side of machine learning.

That latter consideration and AI valuations are driving this year’s market rotation. Investors seeing another dot.com-like bubble are either moving into (cheaper) value- and/or smaller-cap stocks, less volatile sectors like chemicals, "safe harbor" gold (which is actually extremely volatile), and lower-risk bonds. And as for those pedal-to-the-metal investors, every tech dip (which routinely wipes out trillions of dollars in market cap) looks like a buying opportunity.

As for valuations, the tech sector is, by most metrics, expensive. However, there is great variation therein: software stocks are arguably quite cheap whereas chip makers are extremely expensive. A week ago, the forward P/E of the S&P 500’s tech component was said to be 23. That closely aligns with the index’s overall P/E of 22 which is understandable given tech’s prominence in the index. As such, the market’s bargain-hunters have turned to financials, health care and energy, though only the latter had, last month, the wind to its back.

Market Indexes
The Nasdaq Composite’s 1.0% gain in January was wiped clear by February’s 3.3% decline; for the year-to-date it’s down 3.0%.

Other major equity indexes are faring better, though not dramatically so. Nevertheless, they do speak to investors’ shifting interest in non-tech alternatives. The Dow Industrials, for example, rose a fractional 0.3% last month, and is now up 2.1% for the year. The delta between it and the Nasdaq is nearly five percentage points, and the first quarter still has a month to go. As for the S&P 500, it slipped 0.8% in February and for the year-to-date is up a modest 0.7%.

Better results have so far been achieved "downstream" with the small-cap Russell 2000 inching 0.8% higher last month and the Russell Midcap Index jumping 3.7%. (Both gauges are up over 6% this year.)

Stock Funds
Not surprisingly, Fidelity’s 12 mid-cap-oriented funds were among last month’s top performers. Mid-Cap Stock and Stock Selector Mid Cap led the way with gains of 6.3% and 5.0%, respectively, and Mid Cap Value popped 4.9%. Smaller-cap offerings also fared well. Stock Selector Small Cap and Small Cap Value both gained 3.8%.

Some of February’s worst-performing funds include the top-performing, tech-rich funds of the past three years including Fidelity Fund (down 2.9%), Blue Chip Growth (down 2.3%) and OTC (down 1.3%). That said, all fared better than Large Cap Growth Index (down 3.4%) which is a feather in the cap for active fund management.

On that note, this month we have modestly downgraded several growth-oriented (tech-heavy) index funds, including Large Cap Growth Index. Now rated Hold from OK to Buy, savvy managers have the opportunity to pick winners from losers in the ever-changing world of AI, whereas index funds are beholden to rigid benchmarks.

Last month’s returns among Fidelity’s more popular funds (as measured by assets), provided few surprises given their respective benchmarks. In the case of the large-cap growth Contrafund, it slipped 1.0% (as did Growth Co.), and Growth Discovery declined 1.3%.

Among large-cap value funds, Equity-Income and Equity Dividend Income both popped 4.5%, whereas the mid-cap oriented Low-Priced Stock managed a gain of 3.4%. In this case, the fund’s 38% foreign stake was beneficial.

International Funds
With the U.S. dollar unchanged last month, the average Fidelity international fund rose 4.3%.

Fidelity’s two Japan funds fared best with gains of 9.0% and 10.7%. Their performances were bolstered by a national election which affirmed the country’s new prime minister’s plan to stimulate its economy via monetary and fiscal means.

Another top-performer was Canada fund (up 7.7%). Banks delivered analyst-beating earnings, mining companies benefited from rising commodity prices (including gold) as well as a market shift towards industrials.

And, while Norway once again ran roughshod over the rest of the world in collecting gold medals at the Milan Winter Olympics, Nordic fund was the category loser with its 0.5% decline. (In fairness, Norway is only a 9% weight in the fund versus nearly 50% for Sweden.)

Taking a wider view, the developed-market International Index fund gained 4.8% while Emerging Markets Index jumped 5.7%.

Select Funds
With gold prices gaining over 3% in February, Select Gold was the month’s top-performing fund with a gain of 23.4%; it’s now up 36.6% for the year-to-date. Closing the month at nearly $5,300 a troy ounce, it’s worth remembering that the fund’s volatility is more than two-and-a-half times greater than the S&P 500. (We rate Gold Sell based on its risk, but if you’re inclined to hold some for 10+ years, limit your stake to 5% or less.)

On the losing side of sector investing, Brokerage & Investment fared worst (down 12.2%) as investors see that area as especially vulnerable to AI disruption.

However, other big losers were all tech-related. That also speaks to the market’s struggling to understand which companies stand the most to win and lose in the age of machine learning. To that end, Software & IT Services, Enterprise Technology Services and FinTech plunged 10.8%, 10.0% and 8.9%, respectively.

Fixed Income Funds
With inflation metrics that continue to show conflicting progress in bringing consumer and wholesale prices lower, coupled with the Fed satisfied to leave rates unchanged, bonds have rallied across the entire maturity spectrum this year.

The best explanation is their safe harbor status, especially relative to volatile stocks and our oft-mentioned market rotation within the equity universe.

The yield on the benchmark 10-year Treasury dropped 11 basis points last month (and is now down 29 basis points this year) to 3.97%.

With that drop, U.S. Bond Index rose 1.6%. Long-Term Treasury Index, Fidelity’s most interest-rate-sensitive fund, soared 4.2%. Warning: With its duration of 14.5 years, it is even more volatile than the S&P 500.

On the tax-free side, Muni Income and Tax-Free Income rose 0.5%.

Ultra-short-term Conservative Income Bond also benefited from falling rates: in February it rose 0.3%, though its yield fell to 3.73%.

Likewise, the yield on Gov’t Cash Reserves (a money market fund) ended February at 3.36%, down from 3.41% a month earlier.

— John Bonnanzio