Assessing the Impact of Developments in Iran: Watch Energy
Kristian Kerr | Head of Macro Strategy Last Updated: March 02, 2026
Over the weekend, the United States and Israel conducted a coordinated series of missile and drone strikes against Iran, targeting several high-value military installations in an effort to hinder Iran’s nuclear development efforts. These operations resulted in the death of Iran’s Supreme Leader, Ayatollah Ali Khamenei, marking a significant escalation and immediately heightening regional tensions. Iran quickly retaliated by launching a broad series of missile attacks directed not only at Israel but also at multiple Gulf states, including Qatar, the United Arab Emirates, and Bahrain. The repercussions were felt across the region. Several Gulf countries responded by shutting down their airspace and closing their equity markets. The conflict also affected global energy flows. Tanker traffic through the Strait of Hormuz, a vital waterway that carries about 20% of the world’s oil supply, came to a near standstill as shipping companies diverted vessels away from the area for safety reasons. Plus, Qatar shuttered liquefied natural gas production at the world’s largest export facility after being targeted by an Iranian drone strike. President Donald Trump stated that U.S. strikes on Iran would continue, signaling that tensions are likely to remain elevated for the next few weeks.
From a market perspective, the energy market is the primary way through which this crisis is likely to impact global markets. Any sustained disruption to oil or natural gas flows, especially if both severe and long lasting, have the potential to influence inflation expectations, weigh on business confidence, and elevate volatility across asset classes. In simple terms, the more intense and prolonged the geopolitical shock, the larger the likely market impact.
This pattern was already evident when markets opened on Monday. Brent crude, the global benchmark for oil prices, briefly touched $82 per barrel as traders responded to the possibility of tighter supply conditions. A sustained period of elevated prices would place upward pressure on inflation expectations, and that in turn could have broader consequences for both equity and interest rate markets. However, for such a persistent rise in crude prices to materialize, markets would likely need evidence of a more prolonged or even total shutdown of the Strait of Hormuz. A disruption of that scale would represent a meaningful escalation relative to what has occurred so far and would justify a more substantial risk premium in energy markets. There is also a political dimension tied to Iran’s internal stability, particularly regarding how the Islamic Revolutionary Guard Corps (IRGC) chooses to respond. Whether it opts to pull back or escalate further will play a major role in determining how much of the current shock reflects elevated risk premiums versus a true disruption to physical supply.
Oil Prices Spike as Strait of Hormuz Tanker Traffic Stalls
Source: LPL Research, Bloomberg 03/02/26. Disclosures: Past performance is no guarantee of future results.
Given how rapidly the situation continues to evolve, closely following movements in energy prices remains one of the most effective ways to assess the level and durability of the underlying geopolitical risk. Oil and natural gas markets tend to adjust quickly to new information, which means they can serve as a real-time barometer of whether tensions are beginning to ease, stabilize, or intensify. Monitoring these markets will therefore be essential for understanding how the conflict may continue to influence global market conditions in the days and weeks ahead.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures – International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Bonds are subject to market and interest rate risk if sold prior to maturity. High yield/junk bonds are below investment grade securities and are subject to higher interest rate, credit, and liquidity risks.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
Dividend strategies, a.k.a. equity income strategies, have outperformed to start the year, owing to the value-led cyclical rotation we are seeing in domestic equity markets. Looking beyond current performance, this week, we ask and answer the question “How should I think about dividend stocks or building an equity income portfolio?”
Executive Summary
The idea of lying on the beach while your money works for you is often idealized in the financial media and by financial professionals alike. And why not? Investors love passive income, whether it comes from interest payments via fixed income securities, rental income from a real estate investment, or dividends from a stock portfolio. Our focus is on dividends, and understanding different approaches investors can incorporate into equity allocations. In this week’s Weekly Market Commentary, we analyze different equity income strategies, explain why we believe incorporating quality makes sense, and review technical charts to understand what’s potentially on the horizon for the near-term performance of different equity income strategies.
Key Takeaways
Look Beyond Simple Dividend Yields. Our research shows that building a systematic dividend income strategy based solely on high dividend yields underperforms strategies based on total shareholder yield (dividend + buyback yield) or dividend growth.
Pay Attention to Price-Based Returns. When analyzing equity income strategies, it is important to consider both sources of total return: current income and price-based returns (i.e., capital appreciation). Myopically focusing on total return ignores many real-world considerations like taxes, transaction costs, and current income requirements.
Keep Quality Front of Mind. Given the susceptibility of high-dividend strategies to unknowingly fall into value- or yield-traps, we suggest “paying up” (i.e., accepting a slightly lower yield) to increase quality in any equity income portfolio, but especially in one focused solely on high dividend yields.
What’s Working Today? Dividend-oriented equities remain in strong uptrends, supported by solid momentum and improving relative strength versus the broader market. The simple dividend yield strategy is currently leading on a short term basis, but longer-term relative trends favor continued outperformance from dividend growth and shareholder yield within the dividend stock landscape.
Equity Income: More Than Just Dividend Yields
For many investors, the desire for yield is a bedrock of their portfolio construction strategy. In this pursuit, dividend-paying stocks are often chosen for a portfolio’s equity allocation, providing a tangible cash return alongside the potential for capital appreciation. The starting point for most investors when building a portfolio of dividend paying stocks is the dividend yield. It is a straightforward, easily calculated figure that provides a framework for stock selection. Simply choose among the highest dividend yields to generate the highest level of income relative to capital invested. This dividend yield approach serves as a baseline strategy for comparison.
We propose an alternative framework for building or selecting an equity income portfolio, built around two enhanced strategies. The first is dividend growth, which shifts the focus from the level of the dividend today to the durability and consistent growth of the dividend over time. The second is shareholder yield, a more comprehensive metric that captures the total capital returned to shareholders by combining dividends with net share buybacks.
There is empirical evidence, by way of established third-party equity indexes, that enhanced equity income strategies such as these have generated compelling returns relative to simple high dividend yield strategies. Indexes that follow a shareholder yield index, such as the Morningstar U.S. Dividend and Buyback Index and those that follow a dividend growth index, like the S&P U.S. Dividend Growers Index have generated higher total return (inclusive of reinvested dividends) as well as higher capital appreciation (measured by cumulative price returns) than a basic high dividend yield index like the S&P 500 High Dividend Index.
Historical Total Returns Are Compelling for Enhanced Dividend Strategies
Price-Based Returns Have Driven Dispersion Among Equity Income Strategies
Capital Appreciation Tradeoff: High-Dividend Strategies Provide Higher Current Income
Current Technical Setup: Dividend Stocks Continue to Climb
Conclusion
Our analysis of equity income strategies suggests there is value in a multi‑faceted approach that looks beyond dividend yields. The insights gleaned from this analysis apply to building rules-based screens or systematic “quant” strategies as well as supporting discretionary “quanta‑mental” investment processes, where factor insights inform, but do not replace fundamental judgment. Technical analysis suggests recent outperformance of the basic high dividend strategy may be fleeting and that both of the enhanced equity income strategies show better relative strength.
Looking ahead, the historical results make clear that simple dividend screens may not be adequate for today’s market environment. As capital allocation practices evolve and corporate balance sheets continue to diverge in quality, the opportunity set for equity income investors will increasingly support looking to approaches that go beyond headline dividend yields. A continued shift toward strategies that balance income with capital appreciation (dividend growth), total shareholder return (shareholder yield), and balance‑sheet strength (quality integration) will be essential for generating more resilient outcomes over time.
Adam Turnquist, Chief Technical Strategist, LPL Financial Tom Shipp, Head of Equity Research, LPL Financial
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value
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LPL Research’s Strategic Asset Allocation (SAA) sits at the center of our portfolio construction process because it defines how we expect diversified portfolios to generate more stable long‑term outcomes across shifting market environments. The SAA is the long‑term plan for how major asset classes work together in a portfolio. It sets target weights for stocks, bonds, and diversifiers over a three-to-five-year horizon with the goal of improving risk‑adjusted returns through balance, valuation discipline, and purposeful diversification. We review it annually to reflect meaningful shifts in long‑run drivers like growth, inflation, interest rates, and asset class characteristics. The 2026 update seeks steady compounding by rightsizing equity risk, anchoring in high‑quality fixed income, and preserving sleeves in real assets and select alternatives so portfolios remain resilient across a range of outcomes. In this edition of the Weekly Market Commentary, we highlight some key elements of the 2026 SAA update.
#1: What is Changing in the 2026 SAA?
Our Strategic Asset Allocation is the long‑horizon blueprint that guides portfolios across market cycles. For 2026, we maintain a modest, but slightly reduced, underweight to total equity risk, reduced domestic small caps, increased exposure to developed international and U.S. large value equities, and maintain a purposeful allocation to real assets and select alternative investments. Core high‑quality fixed income remains the anchor. We are measured with longer-duration Treasuries given less stable correlations, which supports a more balanced risk posture at a time when the compensation for taking equity risk is fair but not abundant.
Stock Valuations Are Fair Relative to Bonds, So the Equity Risk Premium Offers Limited Compensation
Valuations suggest sizing equity risk for balance rather than bravado
Source: LPL Research, Bloomberg 12/31/25
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
#2: The Strategy Behind the Strategy
Each year LPL Research updates its Capital Market Assumptions (CMA). These long‑term return, volatility, and correlation assumptions underpin the SAA and serve as the bridge between our multi-year macro outlook and the strategic portfolio weights. The CMA translates outlooks on growth, inflation, and valuations into the disciplined set of portfolio weights in the SAA. We revisit the CMA and SAA annually because long‑term drivers and asset characteristics do evolve, even when our horizon is three to five years.
Over this time horizon, the SAA is built to be durable, not delicate. We blend multiple independent signals in a Black‑Litterman1 framework and validate model outputs against the LPL Research Strategic and Tactical Asset Allocation Committee’s (STAAC) outlook before finalizing weights. This process helps ensure no single viewpoint dominates the allocation and that portfolios reflect a balanced and diversified set of long‑term drivers.
The aim is that each building block must either improve expected returns or reduce expected risk versus our diversified benchmarks. LPL Research evaluates asset classes for sensitivity to many factors, which may influence the expected returns of equities, fixed income, diversifying strategies, and cash over a strategic investment horizon, including economic growth, inflation, interest rates, business cycle, valuations, fundamentals, geopolitical risk, volatility, and dispersion. Higher cross‑asset dispersion increases the value of strategies that can respond to divergent trends
Valuations play a particularly critical role in our strategic framework, as historically they have demonstrated a high correlation with long-term market performance. The price-to-earnings ratio (P/E) for the S&P 500 Index, for example, has shown predictive power for subsequent decade-long returns, with higher P/Es typically preceding weaker long-term performance and lower P/Es often followed by stronger results. This relationship between starting valuations and subsequent returns supports patience and informs how we size risk exposure and tilt across styles within the SAA context.
1 This approach “allows us to generate optimal portfolios that start at a set of neutral weights and then tilt in the direction of the investor’s views”. Black, Fischer, and Robert Litterman. “Global Portfolio Optimization.” Financial Analysts Journal 48, no. 5 (1992): 28–43. www.jstor.org/stable/4479577
Stock Valuations Have Been Good Predictors of Long‑Term Returns
Starting points matter. Valuation discipline is why strategically we emphasize patience over prediction
Source: LPL Research, FactSet 01/31/26 (Data from 1991 to present)
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
#3: Equity Positioning for this Cycle
Within the 2026 SAA, we retain meaningful equity exposure but keep it modestly below benchmark exposure levels. We increase U.S. large-value and developed international equities where starting valuations, income, and stability characteristics strengthen the long‑run strategic investment case. We trim small cap equities to balance return potential with volatility, acknowledging a tighter risk-reward today, but we still believe in their role over full market cycles and keep a material overweight relative to a purely global market cap baseline. Reducing small caps modestly allows the portfolio to benefit from their long‑term potential while avoiding excess volatility during periods when quality and income characteristics in larger‑cap markets seem more compelling. The result in this vintage of the SAA is a steadier mix of equities that relies less on a narrow set of increasingly concentrated outcomes and more on diversified drivers of return.
The strategic lens through which we view the SAA is intentionally insulated from week‑to‑week, and especially day-to-day, narratives. Even as headlines swing (sometimes intra-day) from AI enthusiasm to disruption worries, the SAA stays anchored in valuations, cash flow durability, and cross‑asset relationships that matter over multiple years. This helps prevent short‑term sentiment swings from pulling long‑horizon portfolios off course. We believe that recognizing and aligning the likely time horizon of investment drivers and the desired model investment time horizon, strategic or tactical, is a cornerstone of effective portfolio management. Sometimes our strategic and tactical views diverge due to the difference of emphasis that each place on valuations, fundamentals, and technicals.
#4: Fixed Income: Diversification, Liquidity, and Income
The bond sleeve does three jobs for strategic investors — it provides income, it supplies liquidity, and through diversification it offers ballast when risk assets stumble. We emphasize high‑quality core taxable bonds, and, for tax‑aware investors, investment‑grade municipals can stand in for the core sleeve where appropriate. We keep duration (interest-rate sensitivity) from dominating the defense and let the core sleeve do what it does best and provide risk mitigation in ordinary financial market corrections, something that longer-duration fixed income may not do. Recent years have shown that stocks and longer‑duration bonds can sell off together, which is why we avoid overly relying on duration for downside risk mitigation. As such, our strategic stance recognizes a range of inflation outcomes and less stable stock‑bond correlations. We maintain a measured stance on long nominal Treasuries and prefer short‑duration Treasury Inflation- Protected Securities (TIPS) as a tool for hedging upside inflation surprises over a three-to-five-year horizon. While spreads remain tight, we are also careful about reaching for yield in non‑core segments of fixed income markets (unless above benchmark yield is a specific portfolio goal).
#5: Diversifiers That Earn Their Keep
Diversification is intentional, not ornamental. We maintain exposure to real assets and a focused lineup of alternative investments because each brings a distinct job to the portfolio. Real assets, including commodities and global listed infrastructure, help address inflation and provide different growth sensitivities. Their role is especially important in an environment where inflation has moderated but remains influenced by structural forces. Alternative investments, such as multi‑strategy, global macro, and managed futures, can reduce volatility, help during periods of trend divergence, and mitigate concentration risk. We hold these asset classes because they either improve expected returns or reduce expected risk, not because they are fashionable.
The Growth with Income (GWI) balanced 60/40‑style investment objective of the SAA shows how equities, quality bonds, and diversifiers share the work from a portfolio perspective. This core portfolio highlights how equity exposure drives long‑term return potential, how core fixed income provides income and stability, and how real assets and alternatives help manage inflation and volatility so the mix can compound more steadily over a full market cycle. These diversifiers play an important role when traditional stock‑bond relationships behave unusually, offering additional pathways for portfolios to navigate shifting macro conditions.
LPL Research Strategic Asset Allocation, Growth with Income (GWI) 60/40
Within GWI, equities, quality bonds, and purposeful diversifiers each contribute to balance
Source: LPL Research, FactSet 02/23/26
Disclosures: Core Strategic Asset Allocations are designed to seek capital growth and income generation by employing a strategic approach that adapts to evolving capital market assumptions. The objective is to provide a total return in excess of the benchmark. LPL shows performance as compared to the Diversified benchmark. The benchmark is created by allocating a portion of the benchmark to stocks, bonds and cash indices in varying proportions according to a model’s risk profile.
Conclusion
LPL Research’s 2026 SAA update steers investors to maintain a modest underweight to equity risk, tilting exposures to large cap value and international equities, and continuing to allocate to a dedicated exposure to a diversifying basket of real assets and alternative investments.
Strategic allocation is about robustness over extended periods, not precision over short ones. Through our combination of qualitative insight and quantitative discipline, we build allocations for a range of outcomes, validate the inputs each year, and let time, income, and disciplined rebalancing do the heavy lifting. That is how the SAA aims to compound steadily over the next three to five years.
LPL clients can speak to their financial advisor about implementing these insights through LPL Research’s strategic models that are available on our managed account platforms, including Model Wealth Portfolios (MWP). These platforms offer flexibility to emphasize LPL Research’s strategic views while also tailoring accounts to individual investment objectives and risk tolerances.
George Smith, Portfolio Strategist, LPL Financial
Craig Brown, Head of Quant Research, LPL Financial
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All investing involves risk, including possible loss of principal.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates riseand bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The MSCI US Broad Market Index captures broad U.S. equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, about 99% of the U.S. equity universe. Indexes are unmanaged and cannot be invested in directly.
All index data from FactSet or Bloomberg.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value
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On February 20, the U.S. Supreme Court ruled that the Trump administration’s tariffs issued under the International Emergency Economic Powers Act (IEEPA) are illegal. The ruling invalidates a big component of President Trump’s sweeping tariff program, including reciprocal tariffs and drug‑related tariffs on Canada, China, and Mexico. These measures were imposed under national emergency declarations.
While the Court did not explicitly order refunds to be paid — instead sending that decision to the lower courts — by some estimates this decision opens the door to potentially as much as $175 billion in tariff reimbursements to U.S. importers.
Here are some of our key takeaways.
Short-term stimulus jolt. Though mostly expected, the U.S. economy, key U.S. trading partners, and corporate America just found out they are getting a short-term stimulus boost. IEEPA had been used for an estimated roughly half of the tariffs imposed by the Trump administration. While the precise amounts are unclear, countries and companies will now play less. An overall U.S. tariff rate that had been expected in the low teens just a few months ago is now unlikely to reach double-digits, even after new replacement tariffs are imposed under different legal authority.
Intermediate-term effects are likely to be minimal. President Trump already revealed his tariff pivot, from IEEPA to Section 122 (which allows for 15% tariffs for 150 days) and Section 301 (which takes several months to investigate). LPL Research believes most of the IEEPA tariffs can be replaced by summertime (Evercore ISI’s policy research team believes 90% of tariffs could potentially be restored).
Trade policy uncertainty remains. While companies paying smaller tariffs is positive for profit margins and the Supreme Court ruling offers more clarity on the future path of tariffs, a lot of uncertainty remains. Markets will continue to debate whether lower courts will force the Treasury to issue refunds. In addition, it’s not clear what this decision means for trade negotiations and completed trade frameworks with other countries (notably, given the USMCA, this news doesn’t mean as much for imports from Canada and Mexico).
Inflation impact is murky. If tariffs have not affected inflation much on the way in, then it follows that they won’t affect prices much coming out. So, while benefits to inflation will likely be minimal, taking a point or two away from expectations for where tariff rates will eventually land can reasonably be expected to lower inflation by a few basis points.
Don’t expect Fed rate cut expectations to move much. The removal of tariffs reduces a source of friction in the real economy. Tariffs were expected to raise input costs, tighten profit margins, and weigh a bit on economic growth — slowing economic conditions are generally supportive for Treasuries. With that drag removed, growth may stabilize at the margin, and inflationary pressures embedded in the bond market could ease faster than markets previously expected. This changes the balance of risks around the Fed’s rate path and may lead to some modest repricing of rate cut expectations and incremental U.S. dollar weakness.
We would fade the stock market bounce in tariff losers. Given tariffs are already in the process of coming back in with President Trump’s announcement of a new 10% global tariff (that didn’t take long), we wouldn’t chase any rebounds in import-heavy consumer retailers. Given mixed post-decision reactions in retailers in Friday’s trading, it appears the market is onboard with this assessment. Among tariff losers, our preference would be to play homebuilders, industrials, and technology hardware/semiconductors over apparel retailers and automakers.
Treasury may face additional short-term funding pressure. For the Treasury market, this trade policy shift removes a meaningful — though not dominant — support to federal revenues and reopens questions about funding pressures at a time when deficits were already poised to remain in excess of $1.8 trillion annually. With less tariff income, the Treasury may need to increase issuance modestly, particularly in bills and shorter‑dated notes, to offset the lost cash flow. This could put upward pressure on yields at the margin, especially in an environment where supply and demand dynamics were already being tested. The initial selloff in the Treasury market on the news was minimal, pushing 2-year and 10-year yields up by just 2-3 basis points (U.S. 10-year Treasury yield is 4.09% as of 3pm ET on February 20).
Refunds may introduce more near-term financing needs. Another key implication stems from the prospect of tariff refunds. Because the Court found the tariffs unlawful, many importers may now file refund claims, potentially up to $175 billion. Even if processed gradually, this creates a new near‑term financing need for the federal government. Any meaningful issuance to bridge refund‑related outflows would likely concentrate in the front end of the curve, steepening it modestly.
That’s where we see things now, but this situation is fluid. We will continue to bring updates as more information becomes available.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
If you judged the S&P 500 solely by its flat year-to-date performance, you may assume it has been an uneventful year for the U.S. equity market. However, underneath the surface of the market is a much different story, as individual stocks are charting increasingly independent paths. Several key factors are driving the dispersion.
First, the economy is creating uneven sector performance as different industries face an evolving set of tailwinds and headwinds. For most of 2025, stocks with artificial intelligence (AI) exposure attracted steady inflows, fueled by optimism around productivity gains, robust earnings growth, and rising capital expenditures. However, the narrative began to change last fall as percolating AI bubble fears transformed into concerns over AI disruption — as discussed in LPL Research’s February 17 Weekly Market Commentary. As investors have more recently discovered, the perceived threat of traditional business models being displaced by accelerating AI capabilities has created a growing list of winners and losers well beyond the software sector.
Second, the rotation out of big tech has underpinned sizable capital flows into value-oriented stocks, small caps, and international equities. Since the tech sector represents roughly one‑third of the S&P 500, this shift has created a “drinking water from a fire hose” effect for many smaller segments of the market absorbing these outsized inflows.
Third, an improving economic backdrop supported by the resumption of the Federal Reserve’s (Fed) rate-cutting cycle, easing inflation pressures, and pro-growth policies from the One Big Beautiful Bill Act (OBBBA) supported broadening growth beyond big tech. The S&P 493, which excludes the Magnificent (“Mag”) Seven names Alphabet (GOOG/L), Amazon (AAPL), Apple (AAPL), Meta (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA), is projected to grow full-year 2026 earnings per share (EPS) by nearly 14%, up from an estimated 10% in 2025 (Bloomberg).
Fourth, accelerating flows into actively managed funds are directing more capital into individual stocks rather than broad index vehicles. While passive funds still represent 64% of all equity assets under management, demand for active equity exchange-traded funds (ETFs) has surged. According to J.P. Morgan Asset Management data, active U.S. equity ETFs now account for 32% of all ETF flows, up from only 6% in 2021.
The rising dispersion in returns and relatively low correlation among S&P 500 stocks has become increasingly apparent on the CBOE S&P 500 Dispersion Index and the CBOE Three-Month Implied Correlation Index. The dispersion index, which has climbed to near multi-month highs, compares the prices of S&P 500 constituent stock options and S&P 500 Index options to quantify market expectations for how differently individual stocks are likely to perform relative to each other. A higher index level implies higher expectations for wider deviations in returns within the S&P 500, and with higher dispersion comes more opportunities for alpha generation (finding winners vs. benchmarks) via active management. The correlation index quantifies the expected average correlation among S&P 500 stocks over a rolling three-month period. Higher readings imply higher expectations for stocks to move more in tandem, while lower values (like now) suggest the market is pricing in more idiosyncratic moves within the S&P 500.
High Dispersion and Low Correlation Create Opportunities for Active Management
Source: LPL Research, Bloomberg 02/13/25 Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
From Worst to First
Dispersion is showing up across S&P 500 sectors as well, with this year’s performance trends flipping last year’s script. Many of 2025’s laggards are now leading, while several of last year’s top performers are trailing. One notable exception is industrials, which has climbed 12% year to date and continues to outperform the broader market.
The energy sector, representing only 3.2% of the S&P 500, has been the standout, gaining 21.3% as of February 13. The surge has been fueled by substantial inflows, with energy‑focused ETFs pulling in $6.3 billion in January alone. That marks the largest single month of inflows to the sector in Bloomberg’s 10‑year dataset, providing a clear example of the “drinking water from a fire hose” effect described earlier.
S&P 500 Sector Performance Comparison
Source: LPL Research, Bloomberg 02/16/25 Disclosure: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Conclusion
The U.S. equity market may look steady on the surface but rising dispersion and falling correlations among S&P 500 stocks reveal a far more dynamic environment beneath. Shifts in the AI narrative, rotations out of mega‑cap tech, improving economic conditions, and accelerating inflows into active strategies are all driving performance gaps across sectors, with more value-tilted and economically sensitive sectors emerging as early 2026 winners. Against this backdrop, investors may benefit from active management, selective stock picking, and sector‑rotation strategies designed to capitalize on broader dispersion and the increased opportunities it presents.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
Wall Street narratives rarely stay still, and recent weeks have underscored how quickly sentiment can change as perceived new information challenges the status quo. Widely discussed anxiety over a potential artificial intelligence (AI) bubble fueled by relentless capital spending on data center infrastructure has now transitioned into a broader set of worries about industry‑level disruption driven by rapidly advancing AI platforms. The software sector has been in the eye of this storm, with legacy enterprise vendors suddenly confronting fears of displacement. That concern has ignited a negative feedback loop that is fueling a ‘sell now ask questions later’ backdrop in the market.
Recently released models from OpenAI and Anthropic have amplified these concerns, extending bearish sentiment far beyond the software sector. Anthropic’s launch of new “Plugins” for its Claude platform, in particular, marks a shift from traditional generative AI responses toward agentic AI capable of carrying out specialized tasks across multiple corporate functions. Insurance carriers, alternative asset managers, legal‑services firms, real‑estate companies, and even transportation names have sold off sharply as investors reassess which business models may be most exposed to AI‑enabled reinvention. The core question now is whether these fears represent an overreaction, or whether accelerating AI capabilities are indeed signaling a fundamental shift in how work and productivity will be defined in the years ahead.
A New Chapter in the AI Story
When uncertainty rises, volatility usually follows as the market has a tendency of pricing in worst-case scenarios quickly. AI’s evolution has accelerated rapidly, shifting from novelty use cases to broad, productivity‑enhancing applications across industries. At this stage of the cycle, it appears apparent AI will continue permeating workflows and reshaping how work is executed, though likely without delivering the dramatic “yellow pages” event some investors now fear.
Undoubtedly, there will be disruption as with any transformative technology, but it probably won’t lead to the extinction of the entire software industry, which is what the market is arguably beginning to price in across many companies in the space. Despite the re-rating in price and subsequent risk premium, fundamental deterioration has been relatively minimal. For example, the S&P North American Technology Software Index, home to 110 predominantly larger-cap software companies, is still forecasted to grow revenues this year by 17% and generate free cash flow margins by around 25% (free cash flows divided by revenue).
It is also important to recognize that many established enterprise software vendors remain deeply embedded within their customers’ technology stacks. Long‑term contracts, combined with costly and time‑consuming switching requirements, create meaningful friction against rapid displacement. Moreover, numerous software companies are incorporating AI directly into their existing product suites through partnerships with leading model developers. Salesforce (CRM), for example, has teamed with OpenAI and Alphabet (GOOG/L) to support its expanding Agentforce 360 platform, enabling customers to build AI agents natively within its CRM ecosystem.
Another DeepSeek Moment
The recent stretch of volatility across the technology sector has revived comparisons to the DeepSeek shock in January 2025. At that time, the China‑based AI firm upended market expectations by releasing its highly efficient R1 model, which delivered apparent performance comparable to leading U.S. systems at a fraction of the development cost, challenging the assumption that only massive capital expenditures could sustain AI progress. The announcement triggered a swift sell‑off across major AI beneficiaries as investors rapidly repriced assumptions around computing demand, competitive moats, and the durability of the broader AI investment cycle.
Although the reaction was sharp, the disruption proved short‑lived as markets stabilized and investors reconsidered the longer‑term implications of cheaper, more efficient AI development on sector leadership and capital spending. As discussed in a recent blog (Hyperscaler Capex Continues to Grow), capital expenditures have only accelerated since the DeepSeek news, with Google-parent Alphabet (GOOG/L), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Oracle (ORCL) expected to spend over $600 billion on AI-related development in 2026.
While today’s AI‑driven market turbulence echoes aspects of the DeepSeek episode, recent price action also mirrors last year’s setup in the Nasdaq Composite, where overbought conditions and fatigue in AI‑related enthusiasm set the stage for heightened volatility. DeepSeek’s announcement at the time added fuel to that backdrop, contributing to steep drawdowns — such as NVIDIA’s more than 20% decline in only a few weeks. But unlike last year, new tariff announcements extended the volatility into April, even as the longer‑term secular AI trend remained firmly intact.
Nasdaq Momentum Mirrors its Pre‑DeepSeek Pattern From Early 2025
Source: LPL Research, Bloomberg, 02/12/26
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Oversold, but is it Over?
Selling pressure has been severe across the software sector. The S&P North American Technology Software Index is down over 20% on the year and currently sits just over 30% below its September record high. Sentiment couldn’t get much worse, and positioning has been mostly a one-way street of short selling. According to Commodity Futures Trading Commission (CFTC) data, asset managers sold around $3.6 billion of Nasdaq futures during the week ending February 3, marking the largest week of short positioning in 11 months. Momentum indicators also reached historically oversold levels, with the Relative Strength Index (RSI) — a momentum oscillator used to measure the velocity of price action to determine trend strength — on the S&P North American Technology Index falling to its lowest level on record.
However, seller enthusiasm has started to fade and buyers have dipped their toes back into the beaten-up software space, especially the retail cohort who began buying the dip at a record pace earlier this month. This shift comes as the index approaches a major support level tracing back to the April lows. While a near‑term bounce is not surprising given the degree of oversold conditions, more technical confirmation is needed to validate a sustained recovery. A decisive move back above 1,915 would reclaim the early‑2024 highs and a major retracement level of the current sell‑off, strengthening the case that the latest rebound represents more than just a temporary relief rally.
Source: LPL Research, Bloomberg, 02/12/26
Disclosure: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Valuation Support
The drastic re-rating of software stocks has brought valuations to historically low levels. Full-year 2026 earnings per share (EPS) estimates for the S&P North American Technology Index have been cut by over 10% over the last four weeks, marking the largest rate of change since the Federal Reserve (Fed) induced market sell-off in December 2018. Even with the downward revisions, software is still expected to grow earnings this year by 25%, according to Bloomberg data. Operating margins are also expected to expand this year to 39% from 23% in 2025. The enterprise value to expected next year’s sales ratio (which measures a company’s current total value to projected revenue for the next 12 months), has dropped to only 6.6, the lowest level since April. While low valuations can sometimes signal deeper structural issues, we believe the recent re-rating may be overly punitive given the broader fundamental strength still evident across the software landscape.
Software Valuations and Earnings Rerate Sharply Lower
Source: LPL Research, Bloomberg, 02/12/26
Disclosures: Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change. The S&P North American Technology Sector Index includes U.S. securities classified as information technology companies, internet & direct marketing retail, interactive home entertainment, and interactive media & services sub-industries.
Implications for the Broader Market
Weakness across the technology sector (particularly within software) has weighed on the S&P 500 this year and contributed to the index’s difficulty breaking through the 7,000‑point barrier. A sustained move to new highs will likely require broader participation across tech and, at minimum, stabilization in software stocks. While the S&P 500’s longer‑term uptrend remains intact, recent pullbacks have come uncomfortably close to retesting the December lows, a key support level that also ties into the “December Lows” indicator introduced by Forbes columnist Lucien Hooper in the 1970s.
Hooper’s work showed that when the index breaks below its December low early in the year, full‑year performance tends to be weak — averaging just 0.6% returns, with only 55% of years finishing positive. In contrast, when the S&P 500 holds above that threshold in the first quarter, average annual returns climb to 19.5%, with 94% of years ending higher.
It’s important to remember, however, that seasonal indicators reflect historical tendencies rather than guarantees. They do not incorporate factors such as earnings trends, monetary or fiscal policy shifts, economic conditions, or geopolitical developments, all of which can significantly influence market outcomes.
S&P 500 Returns if December Lows Fail or Hold in Q1 (1950–2025)
Source: LPL Research, Bloomberg, 02/12/26
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.
Conclusion
Overall, the recent volatility across software and AI‑exposed industries reflects a shift in the market narrative rather than a broad breakdown in fundamentals. While disruption from rapidly advancing AI is inevitable, the market appears to be pricing in worst‑case scenarios that may not fully account for the sector’s resilience and deep customer integration. Software companies continue to demonstrate strong revenue growth, improving margins, and competitive positioning, even as investor sentiment remains strained. Technical indicators also suggest the sector has reached historically oversold levels, creating the potential for stabilization or a rebound as selling pressure eases. Comparisons to past AI‑driven shocks, such as the DeepSeek episode, indicate that initial reactions can overshoot before price finds its footing. Ultimately, a sustained recovery will depend on renewed confidence in software’s adaptability and AI’s role as an enhancer, not a replacement, within enterprise workflows.
Asset Allocation Insights
LPL’s Strategic Tactical Asset Allocation Committee (STAAC) maintains its tactical neutral stance on equities. Investors may be well served by bracing for occasional bouts of volatility, such as those experienced last week. A lot of optimism is still reflected in stock valuations, but fundamentals remain broadly supportive. Technically, the broad market’s long-term uptrend remains intact, leaving the Committee biased to add equities exposure on potential further weakness.
STAAC’s regional preferences across the U.S., developed international, and emerging markets (EM) are aligned with benchmarks, though an improving fundamental and technical analysis picture in EM is noteworthy. The Committee still favors a slight growth style tilt, but value’s strong start to the year has our attention. In terms of domestic sectors, healthcare, industrials, and technology remain on our shopping list, while our conviction on communication services as an overweight has waned recently due to deteriorating technical analysis trends and the mostly negative reaction to fourth quarter earnings.
Within fixed income, the STAAC holds a neutral weight in core bonds, with a slight preference for mortgage-backed securities (MBS) over investment-grade corporates. The Committee believes the risk-reward for core bond sectors (U.S. Treasury, agency MBS, investment-grade corporates) is more attractive than plus sectors. The Committee does not believe adding duration (interest rate sensitivity) at current levels is attractive and remains neutral relative to benchmarks.
Adam Turnquist, Chief Technical Strategist, LPL Financial
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All investing involves risk, including possible loss of principal.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The MSCI US Broad Market Index captures broad U.S. equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, about 99% of the U.S. equity universe. Indexes are unmanaged and cannot be invested in directly.
All index data from FactSet or Bloomberg.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value
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Additional content provided by Brian Booe, Associate Analyst, Research.
Capital markets have faced quite an array of moving pieces over the last couple of weeks, ranging from equity market rotation dynamics, volatile metals and commodity price action, geopolitical flare-ups, global central bank decisions, and high-profile earnings. Focusing on earnings, the five U.S. firms dubbed as data center and artificial intelligence (AI) hyperscalers — Google-parent Alphabet (GOOG/L), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Oracle (ORCL) — recently reported broadly upbeat quarterly results. But it was their spending plans that lived up to the hyperscale moniker and drew the spotlight.
As a result of the hyperscalers’ continued jockeying for dominance in the intensifying AI race, combined capital expenditures (capex) from the five firms are expected to exceed a staggering $600 billion in 2026, predominantly earmarked for data centers and the necessary tools to operate them. META announced a 79% expected jump in spending to roughly $125 billion just a week before GOOG/L unveiled plans to spend around $180 billion. Nonetheless, it didn’t take long for these massive outlays to be bested by a $200 billion capex forecast from AMZN just 24 hours after Alphabet’s report. Plus, the median consensus forecasts from Bloomberg project MSFT to spend around $105 billion for the fiscal year ending in June. The estimated 60% combined increase from a year ago rattled investors with some sticker shock, exacerbating a skid in big tech shares sparked by ongoing rotation dynamics away from the index heavyweights. The bar to clear for sufficient AI returns to satisfy investors keeps getting higher.
Hyperscaler Capex Now Expected to Top $600 Billion
Source: LPL Research, Bloomberg 02/10/26 Disclosures: Based on median 2026 estimates for fiscal year ends. Estimates are subject to change and may not materialize as expected, and past performance is no guarantee of future results.
But One Was Not Like the Others
Although META was an exception to the risk off response, and taking a look under the hood free cash flow was likely a primary factor in allowing the Facebook and Instagram parent to hold up a bit better than its peers. Without diving too deep into financial statement analysis, META’s trailing 12-month free cash flow balance was the only one of the five hyperscalers to gain ground from the prior quarter. While the social technology firm’s capex for last quarter and the year ahead both surprised to the upside, the rise in cash flow balances underpinned Wall Street’s confidence that it is on solid footing for the projected outlays. Outside of META, the remaining four firms all posted a decline in cash flow, kindling jitters that elevated 2026 spending guidance may shorten the timeline on when some (if any) begin to bleed cash — especially considering some (including GOOG/L and ORCL) have already begun to dip into credit markets to fill in funding gaps. Low leverage has been a key theme of the AI spending cycle, and while these behemoths have capacity to take on debt, potentially dwindling cash flows will place more scrutiny on the metric.
Free Cash Flow Dip Likely a Main Factor in Investor Jitters
Source: LPL Research, Bloomberg 02/10/26 Disclosures: Past performance is no guarantee of future results. Free cash flow is calculated by subtracting capital investment from operating cash flow.
Key Takeaways
As seen this earnings season, the outlook for free cash flow will be key in gauging the health and stability of the AI investment cycle. And hyperscalers may be forced to walk a smaller capex tight rope as too little could signal less confidence in the AI outlook, while too much could impair shareholder value. Nonetheless, consensus forecasts still reflect positive, but volatile, cash flow growth ahead.
Some signs of eroding returns on invested capital (ROIC) have also caught investors’ attention. While this is noteworthy and should be monitored, it may not be doom-and-gloom. ROIC has also been volatile and historically has proven to front-run the fruits of the investment. For example, ROIC declined at the start of the AI buildout in 2023, but profits just hadn’t caught up yet.
We expect additional bouts of volatility for big tech and the broad market as the AI debate continues. But based on strong demand and adoption, the AI theme is on solid footing for now, in our view. For markets more broadly, the elevated spending will likely be a boon for earnings across the S&P 500 (as well as many multinational and international companies) as hyperscalers and beyond pay for the materials and industrial equipment associated with the data center buildout. Plus, expected productivity gains from AI development are also expected to be supportive for corporate America and the overall U.S. economy. Wall Street continues to forecast capex for the entire AI industry to reach $1 trillion by 2030, and as a bonus knock-on effect of the build out, some data centers, such as META’s facility in Odense, Denmark, heats 6,900 homes, providing cheaper heating and decarbonization.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
In the February 2 Weekly Market Commentary, we noted the Federal Reserve’s (Fed) potentially constrained policy conditions as resilient growth and above‑trend inflation are intersecting with an increasingly unsustainable fiscal trajectory. That implicit linkage may now be shifting toward something more explicit if Kevin Warsh and Treasury Secretary Scott Bessent get their way.
Warsh has suggested a modernized Fed–Treasury accord to reset boundaries blurred by high deficits, elevated debt levels, and the Fed’s post‑crisis balance sheet expansion. Drawing on the 1951 accord — which restored Fed independence by ending its obligation to cap Treasury yields — he argues today’s high‑debt environment and a balance sheet above $6 trillion warrant a similar effort to re‑establish clarity between fiscal and monetary roles.
Warsh’s comments suggest the accord would emphasize transparency and coordination without fully subordinating monetary policy to fiscal needs. Key elements could include:
Joint Communication on Balance Sheet and Issuance Plans: A new accord could have the Fed and Treasury jointly communicate balance sheet objectives and debt‑issuance plans to give markets clearer guidance during quantitative tightening (QT). Warsh argues this transparency would help the Fed move toward a sustainable balance sheet size while reducing reliance on reactive policy tools.
Narrower Fed Footprint in Markets: The accord might limit the Fed’s use of quantitative easing (QE), restricting large‑scale bond buying to true crises and shifting holdings toward shorter‑term Treasuries. Warsh favors a smaller balance sheet to re‑establish boundaries between monetary and fiscal policy. The Fed’s current long‑duration tilt — holding significant amounts of long‑term Treasuries and mortgage-backed securities (MBS) — would likely be reduced gradually over several years.
It May Take Time to Meaningfully Shrink the Fed’s Balance Sheet
Source: LPL Research, Bloomberg 02/10/26 Disclosures: Past performance is no guarantee of future results.
Addressing Fiscal Pressures Without Yield Caps: While a concern is that this could evolve into “yield curve control” — where the Fed caps long-term rates to manage debt costs — Warsh’s hawkish stance on balance sheets suggests initial restraint. And you could arguably make the case that this is already happening.
The Fed is notably underweight Treasury bills and significantly overweight in long- duration bonds. Currently, Treasuries with maturities of 10 years or more make up nearly 38% of the Fed’s holdings, compared to just 18% of the outstanding Treasury market. While other sectors are roughly aligned, this imbalance reflects the Fed’s reinvestment strategy and its historical focus on longer-dated securities. This skew toward the long end of the curve already resembles aspects of an “Operation Twist” in terms of duration extension.
Perhaps instead, the accord might prioritize fiscal discipline by aligning policies to handle 6–7% deficits (as a percent of GDP) in non-crisis times, potentially through creative maneuvers like adjusting Treasury issuance mixes (e.g., more T-bills), while the Fed steps back from long-end support. That said, if market dysfunction arises (e.g., auction failures or rising term premiums), it could open the door to targeted interventions, though Warsh has emphasized avoiding permanent tools that blur independence.
Safeguards for Independence: To counter concerns about eroding Fed autonomy, the accord could explicitly delineate roles, such as barring the Fed from direct deficit financing while allowing coordination during normalization. Warsh has framed this as a response to the Fed “losing its way” by straying into fiscal territory, aiming to refocus on core mandates like price stability and employment. Critics warn it risks heightening political pressure or bond volatility if perceived as fiscal dominance
Of course, Congress won’t sit idly. Bipartisan concerns over Fed independence could spark pushback. Oversight hearings, resolutions, or conditions on Warsh’s confirmation could force modifications, especially if the accord requires legislative tweaks for durability. Congress holds veto power over statutory changes, making a “skinny” version more feasible than an ambitious overhaul.
Bottom Line: Overall, this accord would likely be a formal, public framework announced jointly by Warsh (if confirmed, as we expect) and Treasury Secretary Bessent, focusing on predictability to manage debt without immediate aggressive easing. Market reactions could include steeper yield curves initially, with dollar strength if seen as pro-sound money, but bear steepening if independence fears dominate. The exact terms remain ambiguous, as Warsh and Bessent have not detailed them, but it could represent a shift toward integrated yet bounded policymaking in a high-debt era.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
Thomas Shipp | Head of Equity Research Last Updated: February 10, 2026
Additional content provided by Tucker Beale, Analyst, Research.
If U.S. Housing Inflection Is Near, Look for More Than Just Homebuilders
Over the last three months, the housing conversation has warmed up again. Markets seem to be saying the next chapter could be “more activity”; i.e., more housing starts, more remodeling, more jobs coming off the sidelines as confidence improves. However, homebuilding is not a simple business. It’s an industry where politics, regulation, and public scrutiny can swing sentiment just as much as mortgage rates and household formation. Recently, two storylines have competed for attention. One is a “pro-building” narrative based on recent Bloomberg reporting that two large homebuilders were developing “Trump Homes,” a pathway-to-ownership program to address affordability concerns for first-time homebuyers (Builders Push ‘Trump Homes’ in Pitch for a Million Houses). Such a program implies a friendlier environment for construction and development. The other storyline is the kind of headline that can drive equity investors toward the exits: reports that the Department of Justice may be looking at anti-competitive practices in parts of the homebuilding ecosystem. (White House considers antitrust probe into homebuilders, Bloomberg News reports | Reuters)
Whether either headline has legs in a legal or economic sense is almost beside the point. The market takeaway is that builders can carry non-obvious headline risk, especially when an industry is concentrated and profitability is visible. Therefore, if your core view is “residential construction activity will increase,” take a page from the AI capital expenditures (capex) boom and buy the picks-and-shovels businesses (i.e., building materials, product manufacturers, and distributors), rather than the homebuilders themselves. These are the companies that make and move the products that show up on every job site, regardless of which builder wins the subdivision. Performance of relevant S&P 500 industry indexes suggests the market agrees, as construction materials, building products, and distributors have outperformed homebuilders and the S&P 500 over the last three and 12 months.
Building Products, Construction Materials, Distributors, Homebuilders, and S&P 500 Price Performance
Source: LPL Research, Bloomberg 02/06/26 Disclosure: Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested in directly.
Source: LPL Research, Bloomberg 02/06/26 Disclosure: Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested in directly.
Builders Have Baggage — Land, Incentives, Politics
Homebuilders can be great businesses in the right part of the cycle, and we appreciate the fact that most homebuilders are better businesses than they were in the last big housing upcycle pre-Global Financial Crisis (GFC). However, results remain influenced by several drivers beyond just “housing demand,” including:
Land economics: Lot costs, option structures, and entitlement timing can matter as much as sales volume.
Incentives and affordability: The builder can keep headline pricing stable while quietly giving up margin via mortgage buydowns, upgrades, and concessions.
Cycle timing: A builder’s profits can be extraordinarily sensitive to small changes in cancellation rates and closing schedules.
Regulatory optics: If regulators decide an industry looks “too concentrated” or “too profitable,” valuations can re-rate quickly, regardless of near-term demand.
In other words, buying homebuilders is often a bet on how housing demand expresses itself (pricing vs. incentives, regional mix, land bank strategy), not just whether demand exists. Acknowledging that homebuilding equities will generally benefit from increased housing demand, we suggest expanding your watchlist to include additional businesses that stand to benefit.
More Building Activity = More Materials and More Distribution Throughput
If you dig deeper beyond headlines and typical investment playbooks, the most reliable beneficiaries of increased housing activity are often the companies that supply the job site, either by making building materials and products or moving them efficiently to contractors and builders. Building materials manufacturers and distributors sit in a different part of the value chain. Their economics are typically more tied to unit volume and turnover, repair and remodel activity levels, and content/product mix. These drivers of sales growth and profit margins matter because housing can improve without turning into a new build-led housing boom. These businesses don’t need every macro variable to line up perfectly, they just need incrementally better activity, and the volume and mix can start to work.
Building materials and product manufacturers:
Manufacturers produce the core components that physically go into a home, such as roofing systems, insulation, siding, flooring, exterior cladding, sealants, etc. When activity improves, they can benefit in three broad ways:
Volume leverage: Many manufacturing operations have meaningfully fixed costs. As utilization rises, incremental sales can carry attractive profit contributions.
Mix and “content per home”: Even without a huge surge in starts, codes and preferences can increase the dollars of material per house.
Performance-driven pricing: In categories where labor-saving installation, durability, and energy efficiency are important, pricing can be based on “value added,” not just commodity costs. The better product portfolios can defend price and attach more components per project by selling integrated systems.
Different types of building materials and product manufacturers include those supplying: (a) the building envelope (i.e., roofing/insulation/weatherproofing) such as Carlisle Cos. (CSL), Owens Corning (OC), and Amrize Ltd. (AMRZ); (b) heating, ventilation, and air conditioning (HVAC) and climate control systems such as Trane Technologies (TT), Carrier Global (CARR), and Lennox (LII); (c) water heating and treatment systems, such as A.O. Smith Corp. (AOS); and (d) other diversified building product manufacturers such as Masco Corp (MAS).
Building products distributors:
Distributors connect manufacturers to contractors and builders by stocking inventory, delivering to job sites, bundling SKUs, and often extending trade credit. In a housing upcycle, distribution can be seen as a direct “activity proxy” because it captures:
Throughput growth: More jobs lead to more orders, whether new build or repair/remodel.
Share-of-wallet expansion: Distributors increasingly try to become one-stop shops across complementary categories.
Operational leverage: Consolidated networks can spread branch, warehouse, and delivery costs across more volumes.
Examples of distributors include QXO Inc. (QXO), privately held ABC Supply, Builders FirstSource (BLDR), TopBuild (BLD), and traditional “big box” retailers like Home Depot (HD) and Lowe’s (LOW), which have expanded their professional distribution businesses in recent years via acquisitions.
As with any supplier/wholesaler relationship, channel consolidation can drive efficiencies but also be detrimental to manufacturers, as distributors may gain bargaining power, pressuring manufacturers’ margins even when end demand improves. That’s why within these “picks and shovels” plays, it is important to focus on quality, which often shows up as product differentiation on the manufacturing side, and supply reliability and service on the distribution side.
Conclusion
The housing investment theme doesn’t have to be a binary decision based on a boom-or-bust homebuilding environment. If activity is simply trending upward, we believe there’s a compelling case for adding exposure to the companies that supply the job site, especially when political and/or regulatory noise make the homebuilders harder to underwrite. Roofing, HVAC, plumbing, and insulation aren’t glamorous. But they are necessary, and they scale with activity. Additionally, as building codes push for energy efficiency and durability, building materials and products can quietly become more valuable per home over time. If the next leg of housing demand is higher, the cleanest beneficiaries may not be the names buying land and managing incentives, but instead the businesses selling the materials, shipping the products, and helping solve the job site’s daily problems.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
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Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
After a stellar 2025 in which emerging market (EM) equities returned 34%, 2026 is off to a good start with the MSCI EM Index up 7% year to date. Last year’s near doubling of the S&P 500 return was driven mostly by a weakening U.S. dollar, which propped up EM returns, but attractive valuations and artificial intelligence (AI) investment played a role. This week we highlight five reasons we’ve warmed up to EM.
#1: U.S. Dollar Looks Like It Wants to Go Lower
Given the dollar was one of, if not the biggest drivers of EM outperformance last year, we’ll start there. The U.S. Dollar Index is on the cusp of breaking a long-term uptrend. Further weakness would potentially introduce 5% downside or more from a technical analysis perspective. Prospects for two more rate cuts from the Federal Reserve (Fed) and a Trump Administration comfortable with a weaker (but stable) dollar to help balance trade increase the likelihood of a breakdown in the currency at some point.
In addition, in a sanction-heavy geopolitical environment that kicked into high gear when Russia invaded Ukraine, central banks around the world have looked to diversify away from the greenback — the rally in gold over the past couple of years provides evidence. Finally, there is a structural anchor on the dollar in the still large — but slightly shrinking — trade deficit with the rest of the world. The more the U.S. spends on imports, the more global supply of dollars there is to weigh on its price based on supply and demand.
One risk to our bearish dollar bias is sticky inflation, which could delay Fed rate cuts. We could also get a technical bounce off 96 due to potential safe haven buying if economic and market conditions worsen (not our base case). A dollar bounce could also come from the incoming Fed Chair signaling a more hawkish bias.
U.S. Dollar Is on the Cusp of a Major Technical Breakdown
Source: LPL Research, Bloomberg 02/05/26 Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
#2: Earnings Growth Is Accelerating
Our hesitation to jump on the EM bandwagon until our upgrade to neutral in early 2025 was centered on earnings. We would attribute much of the EM underperformance since the 2008–2009 Global Financial Crisis to earnings disappointment (though a strong U.S. dollar was another meaningful piece of the story). Year after year, EM fell short of optimistic earnings expectations. In fact, the consensus estimate for EM earnings per share (EPS) this year of around $90 is the same level as 2011, while EPS for the S&P 500 is up over 170% over the same time period.
So, is this time different? These may be the most dangerous words in investing, but we believe it may be. AI is a big reason why. Earnings for EM are expected to outgrow the U.S. and developed international markets (represented by the MSCI EAFE) this year — and there probably isn’t enough time for that to change given we’re in fourth quarter earnings season. For the record, EM earnings are tracking to 16% in the fourth quarter, slightly ahead of the U.S. at 13%.
In 2026, EM earnings are expected to grow 29%, more than double current earnings growth expectations for the U.S. at 14%. EM may miss those lofty expectations, but the avalanche of AI investment in Asia and increased focus on corporate governance, efficient capital allocation, and shareholder returns, including in China, South Korea, and India, position EM earnings and cash flows to potentially outgrow the U.S. as well as Europe and Japan in 2026.
EM Earnings Growth Is Strong and Getting Stronger
Earnings growth (YoY, %)
Source: LPL Research, FactSet 02/05/26 Disclosure: Earnings data based on MSCI EAFE, MSCI Emerging Markets, and S&P 500 Indexes. All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change.
#3: Exposure to AI Boom in Asia
In what may be a surprise to some, the MSCI EM Index has as big an allocation to the technology sector as the S&P 500 at slightly over 30%. Not only is EM a play on AI, as China has made advances and is well positioned to benefit from the new technology, but much of the AI chips and hardware needed for AI data centers comes from Asia.
Emerging Markets Index Is As Tech Heavy As the U.S.
As the accompanying chart illustrates, much of the heavy technology weighting in the EM index comes from Asia, where the top country weightings are China, Taiwan, Korea, and India.
The Overwhelming Majority of the EM Index is Based in Asia
#4: Technical Analysis Trends Are Compelling
Emerging markets opened 2026 with sustained momentum and notably low volatility…
EM Has Broken Out on an Absolute and Relative Basis
#5: Attractive Valuations
We point out all the time that valuations are not good timing tools…
Conclusion
We maintain our positive bias toward EM. LPL Research suggests investors maintain EM equities exposure at least in line with their targets and think about finding some dry powder to add more.
Asset Allocation Insights
LPL’s STAAC maintains its tactical neutral stance on equities…
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value
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