By Keith Gangl
Posted on Mar 2, 2026
The long-anticipated broadening of the equity market was on full display in February. January had already offered early signals of this shift, with international and small-cap stocks beginning to outperform the S&P 500.
In February, that trend accelerated. Small-caps and international stocks continued their winning ways while the S&P 500 posted its worst monthly return since the tariff turmoil of last spring, declining 0.77%.
Small-cap stocks, represented by the Russell 2000 Index (IWM ETF), gained 0.81% for the month, while international developed markets, represented by the EFA ETF , advanced an impressive 4.71%. For much of the past two years, the S&P 500’s performance has been driven by a narrow group of large-cap technology companies, often referred to as the “Magnificent Seven.”
In February, that leadership faded as investors rotated into other areas of the market in search of value and diversification.
Despite the market’s uneven performance, the overall picture of corporate earnings remains robust as we close out fourth-quarter earnings season. According to FactSet, 96% of S&P 500 companies have reported results, reflecting a year-over-year earnings growth rate of 14.2%[1], a healthy outcome by any measure.
The Magnificent Seven, though lagging in price performance, did not disappoint on the earnings front, posting 27.2% growth in the fourth quarter, up from 18.4% in the third quarter.
Meanwhile, the remaining 493 companies in the index increased earnings by 9.8%, a deceleration from the 12.2% growth seen in the prior quarter. Investors will be watching this divergence closely: if earnings growth outside the Magnificent Seven fails to reaccelerate, the broadening-out theme could face a headwind.
Adding a layer of uncertainty as February ended, the United States and Israel conducted military strikes on Iran, a development that could make investors uneasy as March begins. Investors will be monitoring the situation carefully. Historically, geopolitical events have tended to produce short-lived market volatility rather than sustained downturns, but the ultimate impact will depend on the duration and scope of the conflict, particularly whether it expands to other parts of the Middle East.
Oil prices will be a critical variable to watch. A prolonged conflict involving key regional oil producers could drive energy prices higher, reversing what has been a meaningful tailwind for the U.S. consumer and potentially weighing on both corporate margins and broader market sentiment.
February offered an encouraging glimpse of what a healthier, more balanced market could look like. The rotation into small-caps and international equities, combined with solid broad-based earnings growth, suggests the market’s foundation may be widening beyond its recent technology-driven concentration.
However, risks remain. The ability of non-Magnificent Seven companies to sustain and grow their earnings will be a defining test of whether this broadening trend has staying power. Layered on top of that, the evolving geopolitical situation in the Middle East introduces a new source of uncertainty that markets will need to navigate carefully.
As always, staying diversified, disciplined, and focused on fundamentals will be essential for investors managing through an environment that continues to evolve rapidly.