Market Update | Valuations Recalibrate as Growth Moderates

February unfolded as a continuation of the complex and often contradictory macroeconomic backdrop we have seen take shape over recent quarters, one in which slowing growth, mixed inflation and labor market data have shaped the financial markets’ narrative. Equity markets in February were marked by heightened volatility punctuated by a pronounced sell-off in the first half of the month that left the NASDAQ and S&P 500 in negative territory for the month, returning -3.4% and -0.8%, respectively. Meanwhile, the Dow Jones held relatively flat, gaining just 0.3%, underscoring the uneven risk appetite across sectors. International equity markets continued their outperformance of U.S. stocks in February with the MSCI EAFE gaining 4.6% and the MSCI Emerging Markets soaring 5.5%. 

Early in the month, the tech-heavy NASDAQ bore the brunt of a market selloff, with the composite sliding sharply amid rising concerns about stretched valuations in technology and software stocks and the potential for AI-related disruption to existing business models. Software and services shares were hit particularly hard, as investors questioned the sustainability of traditional SaaS models amid rapid advances in AI tools and automation capabilities. Valuation multiples in segments of the software space compressed meaningfully as investors reassessed forward earnings durability and competitive positioning. These stress points were compounded by risk-off reactions to tariff policy uncertainty and trade headlines that unsettled multinational earnings expectations. In contrast, value-oriented and cyclical segments such as energy, materials and industrials showed relative resilience, helping to anchor the S&P 500’s broader performance despite technology and communication service’s heavy weighting within the index of over 40%. 

February’s advanced estimate GDP release by the Bureau of Economic Analysis revealed that the U.S. economy expanded at an annualized pace of 1.4% in the fourth quarter of 2025, a significant deceleration from earlier quarters and a meaningful miss relative to consensus forecasts ranging between 2.5%-3.0%. On a full-year basis, the economy grew 2.2% in 2025 based on an advance estimate, slower than the 2.8% increase in 2024, signaling that economic momentum has softened as monetary policy remains restrictive and consumers grapple with elevated costs and higher borrowing rates. The fourth quarter’s slower pace of growth reflects a combination of reduced consumer spending growth, decreased government outlays partially due to the government shut down and a drag from net exports, even as business investment remained resilient in parts of the capital goods sector.  

The inflation story in February was equally ambiguous, reinforcing the challenge facing both investors and policymakers in interpreting price trends. Headline inflation as measured by the Consumer Price Index (CPI) showed signs of moderation in January, with prices rising at a 2.4% year-over-year rate, down from prior months and below many economists’ expectations, while core CPI (excluding food and energy) came in at 2.5% annually, suggesting that underlying price pressures outside volatile categories had eased modestly. However, the Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) price index, painted a contrasting picture. December’s PCE, released in February following delays related to last year’s government shutdown, showed PCE inflation at 2.9% year-over-year, with core PCE at 3.0%, still well above the Federal Reserve’s 2% target, indicating that a significant portion of price pressures remain persistent. This divergence between CPI and PCE figures complicates the inflation narrative and underscores that while some headline measures appear to be easing, broader consumption-based measures suggest inflation has not fully receded. Both markets and the Federal Reserve will continue to be attentive to the breadth and composition of price pressures rather than any single report. 

In the labor market, the January employment report showed a stronger-than-expected 130,000 new jobs added and an unemployment rate of 4.3%, exceeding consensus forecasts. However, this headline is tempered by the substantial downward revisions to 2025 payroll data, which dramatically cut last year’s job gains from an initially reported 584,000 to just 181,000, implying an average of roughly 15,000 net jobs per month and marking the weakest annual job growth outside of recessionary periods in decades. This juxtaposition of a strong January print against a much weaker underlying trend suggests that while employment conditions are not deteriorating rapidly, the labor market is more subdued than headline numbers alone would imply. Rather than signaling a robust rebound, January’s job gains may reflect volatility layered on a soft baseline, reinforming a narrative of “low-hire, low-fire" dynamics that keep unemployment low but reveal limited momentum in broad-based hiring.   

This data comes on the heels of the Federal Reserve’s January meeting, where policymakers maintained the federal funds rate at current levels, citing persistent inflation and a stabilizing, rather than weakening, labor market. Market pricing of interest rate expectations shifted modestly during the month but continues to suggest that the first rate reduction of 2026 may be delayed relative to earlier projections, given the inflation resilience reflected in PCE data and the unexpected firmness in employment figures. 

February’s economic and market activity reaffirmed that the U.S. economy and financial markets are navigating a phase defined by moderation rather than crisis: growth is slowing but not contracting, inflation is easing on some measures but persistent on others, and the labor market, while cooling, remains somewhat stable. For investors, this environment calls for balanced positioning that acknowledges both the uncertainties and opportunities inherent in a transition from an inflation-driven cycle toward a more normalized economic regime. As the year progresses, fresh data releases on inflation, employment and spending will continue to influence expectations around monetary policy and market risk, making it imperative to evaluate trends through a multi-indicator lens rather than relying on any single data point. 

Legal Update | Department of Labor Announces 2026 National Enforcement Priorities for Retirement Plans

On January 15, 2026, the Department of Labor’s Employee Benefits Security Administration (“EBSA”) released its updated national enforcement projects, outlining the areas where EBSA intends to focus enforcement and investigative resources in the coming year. These priorities provide helpful insight into EBSA’s enforcement approach and identify operational and compliance areas plan sponsors and fiduciaries should consider reviewing proactively.

EBSA’s enforcement initiatives apply broadly to both retirement plans and other employee benefit plans and emphasize fiduciary process, oversight and participant protections.

Key 2026 Enforcement Priorities for Retirement Plans

Cybersecurity and Protection of Participant Data

EBSA continues to view cybersecurity as a growing risk to retirement plans and participants, particularly given the sensitive personal and financial data held by plans and their service providers. EBSA has emphasized that plan fiduciaries have an obligation to take reasonable steps to mitigate cybersecurity risks and that cybersecurity practices are frequently reviewed during investigations.

As part of its enforcement efforts, EBSA evaluates how both plans and service providers identify, assess, and address cybersecurity threats. EBSA strongly encourages plans to adopt and maintain a formal cybersecurity program, including periodic risk assessments, service provider reviews and incident response planning. This enforcement focus builds on EBSA’s cybersecurity guidance issued in 2021 and updated in 2024.

Protecting Benefit Distributions

EBSA’s Protecting Benefit Distributions (PBD) Project is designed to ensure that retirement benefits are paid timely and accurately to participants, even where administrative or financial challenges exist. EBSA has identified several recurring scenarios in which earned benefits often go unpaid or delayed:

• Terminated Vested Participants. Benefit payment issues commonly arise when employees earn vested pension benefits but leave employment before benefit commencement. EBSA focuses on whether plan sponsors maintain adequate records and procedures to ensure payments begin when participants become eligible, and in no event later than a participant’s required beginning date for required minimum distributions. Investigations often examine compliance with EBSA’s missing participant guidance, including census accuracy, participant communication efforts and missing participant search practices.

• Distressed Plan Sponsors. Financial distress, including bankruptcy, can result in missed contributions and, in severe cases, diversion of plan assets. EBSA relies on early investigative intervention in these situations to prevent losses and more quickly correct issues involving asset diversion, excessive expenses and delinquent contributions.

• Abandoned Plans. EBSA also continues to target plans that have been abandoned due to events such as death, neglect, insolvency, or bankruptcy. Enforcement efforts focus on locating abandoned plans, ensuring required filings are completed and securing participant benefits. EBSA will coordinate with remaining fiduciaries and review the conduct of custodial service providers to confirm that abandoned plans are administered in participants’ best interests and without unreasonable fees or expenses.

Retirement Asset Management

EBSA’s retirement asset management enforcement initiative focuses on whether fiduciaries follow a prudent and well‑documented process in selecting and monitoring plan investments, service providers and fees. Investigations typically examine fiduciary decisions making processes, documentation, fee reasonableness and whether fiduciaries appropriately manage conflicts of interest.

ERISA Section 404(c) Plans. (Defined contribution plans that allow participants to direct their own investments, with fiduciaries receiving liability relief for losses resulting solely from participant investment decisions if ERISA’s disclosure and oversight requirements are met.)

EBSA has emphasized that ERISA § 404(c) does not eliminate fiduciary responsibility for selecting and monitoring the plan’s investment lineup. Enforcement reviews assess whether fiduciaries engaged in a prudent process when choosing and overseeing designated investment alternatives and whether fiduciaries provided participants with the disclosures required under the regulations.

• Underfunded Defined Benefit Plans. In situations where pension plan underfunding poses a risk of reduced or lost benefits, EBSA reviews fiduciary investment decision‑making closely. Enforcement efforts focus on whether fiduciaries adopt and monitor investment strategies prudently and avoid overly risky or unsuitable investments intended to improve funded status at the expense of participant security.
• Investment Advisers and Managers. EBSA also conducts service‑provider‑level reviews of ERISA § 3(21) investment advisers and § 3(38) investment managers, often through investigations of 404(c) plans. These reviews are designed to identify potential conflicts of interest in the recommendation or implementation of investment options and to assess the adequacy of fiduciary oversight.

Contributory Plans Criminal Project

The Contributory Plans Criminal Project targets intentional misconduct and fraud involving employee contributions and other plan assets. EBSA coordinates closely with federal, state and local law enforcement agencies to investigate and prosecute individuals who knowingly misuse or divert plan funds. These matters frequently involve parallel civil and criminal proceedings and can result in significant personal liability for responsible individuals.