Prices Drive Narratives, Discipline Drives Outcomes

We continue to expect technology company leadership on both the way up and the way down in the broader equity markets, but this week revealed some very interesting market dynamics that offer some encouragement despite tech weakness over the past few weeks. The last five calendar days witnessed 25% of S&P 500 constituents reporting quarterly earnings along with several significant non-U.S. corporate releases, providing investors with global perspective on consumer and business momentum. Technology was a large focus this week alongside global energy, consumer products and healthcare companies, and a few themes emerged.

First, at about 60% of the way through earnings season, sales have grown 9.3% and earnings are up nearly 14%. Technology and communications remain the fastest growing sectors so far this quarter, with over half of their company constituents having already reported. Second, we did see some positive sales and earnings surprises from the healthcare and energy sectors this week. While both sectors have more companies in the queue to report, energy in particular has been a strong performer so far this year, but healthcare continues to lag many of its peers.

One theme you may continue to hear about is “broadening out” — or migrating from an environment of such narrow sectoral leadership (more in the section that follows) to one where previously lagging sectors begin to propel markets higher. Most major equity indices (the Dow Jones Industrial Average, a price-weighted index, being an exception) are market capitalization-weighted, meaning a company’s weight in the index is a function of its market value (simply, the share price times total shares outstanding) relative to other index members; the larger a company’s value, the larger its weight. As a consequence, the large individual weights of technology companies in the S&P 500 make this index very tech-heavy, and very responsive to individual tech company performance. If, instead, every index member had an equal weight, the index would be less responsive, or vulnerable, to a given sector, industry or company. What we have started to see since late October is equal-weighted index performance exceeding both technology and broad S&P 500 performance, suggesting greater contributions from other sectors, with energy, materials and consumer staples notable winners. While this broadening out can generally be considered a positive given high technology company weightings across many indices, the math dictates it will be hard to sustain rallies without some level of tech stability. 

Technology has been a unique category over the last three calendar years: While the S&P 500 has returned over 86% during that period, communication services and information technology (the index’s two major tech categories) have delivered total returns (including dividends) of 192% and 167%, respectively. Artificial Intelligence (AI), semiconductors, data center buildouts and cloud computing/hosting have all been major performance underpinnings. Consistently rising sales and earnings growth expectations drove share prices higher, both for companies driving AI innovation and also for companies within the AI ecosystem helping to fuel that growth.

As we shared last week, we have migrated from an environment where investors initially asked companies if they had an AI strategy to one where investors seek evidence that company AI spend is translating to returns and if growth rates are sustainable and justify capital expenditures. This week sent a clear message to companies; if you spend more money on projects than you previously said you were, and if you don’t appear to have sustainable growth rates that justify your spend, your stock will suffer.

Software companies were notable underperformers this week, with private company Anthropic releasing tailored AI solutions for industries such as financial services and law and for common corporate functions such as sales, human resources and marketing. Anthropic’s Claude “plugins,” or virtual assistants, challenge several existing business models on both cost and functionality, sending stocks of companies like Workday, Salesforce, Adobe and ServiceNow sharply lower. In addition to equity market weakness, software remains a prevalent industry within lending markets, with software company bonds and select private credit companies also seeing some price backlash.

Anthropic’s innovation is causing disruption similar to that felt when DeepSeek released its AI chatbot application in January 2025, representing a cheaper alternative to existing technologies. We expect the disruptive trends to continue: As the adage goes, nothing draws competition like high margins and high cash flows, and, where appropriate, private markets continue to offer opportunities within innovation’s circuitous path. 

Starting with the Bank of England (BoE), a few things stand out to us. First, the decision to hold rates was closer than expected: The committee voted 5-4 to maintain policy, but expectations were for a 7-2 vote. Similar to the U.S. Federal Reserve (Fed), dissents and diverging opinions are becoming more prevalent across major central banks. For the U.K. specifically, the BoE forecasted a more dour economic outlook and a rise in unemployment, which have typically been enough to justify a potential cut.

However, we have to remember that the BoE does not have a three-part mandate like the Fed, which has to foster price stability, promote full employment and maintain moderate long-term interest rates. Rather, the BoE has a hierarchical mandate with price stability as its primary objective and growth and employment secondary as long as they are not in conflict with the first. BoE members expressed skepticism that they can meet their 2% inflation target on a sustained basis this year, and only if the target were met would more voting members look to join those looking to cut rates.

The European Central Bank (ECB) kept target interest rates at 2% (almost half the Fed and BoE targets) for the fifth consecutive meeting. ECB Chair Christine Lagarde highlighted a resilient economy with strong household balance sheets and past interest rate cuts helping the economy, but she also stressed risks to trade and geopolitical tensions. A significant follow-on to the ECB meeting emerged earlier on Friday ahead of a European Union summit on February 12. The ECB sent a document to EU leaders encouraging “urgent collective action,” including strengthening savings and investment, driving easier and deeper trade within the continent, innovation initiatives and legislation ease.² European equity markets continue to offer attractive valuation, yet they need more sustainable consumer-led growth, so we will continue to monitor developments emerging from the summit and beyond.

We continue to defer to Northern Trust’s outstanding economics team for the broader house view, but with respect to capital market-centric releases, we would highlight a few items here. First, the Bureau of Labor Statistics’ much anticipated labor market data was pushed this week due to the partial government shutdown, so, while we await that release, private surveys and corporate earnings releases suggested a still sluggish labor backdrop. As we have shared, consumer momentum beyond the 2025 holiday season is a key variable on our minds, and, while credit measures appear stable, labor markets unlocking will be key.

Second, global manufacturing data showed some signs of improvement, albeit modest and at times volatile. While trade imbalances continue, countries have been active in signing new and continuation accords, so new market openings could offer momentum, although progress appears to be perpetually lower than expectations or industrial reshoring narratives might suggest. That said, the ISM Manufacturing data released on Monday pointed to new orders, production and delivery gains for U.S. manufacturers, offset by inventory and employment drags.

Finally, consumer sentiment remains a focal point, and Friday’s University of Michigan data series offered some encouraging signs. Overall sentiment is the highest it has been in six months, with both survey assessments of current and future conditions improving relative to estimates. Inflation expectations — a key variable to gauge how consumers are anticipating potential price increases — fell from 4.0% to 3.5% for the year ahead and clocked in at 3.4% on a more forward view. These readings suggest a cautious optimism from consumers as they think through consumption decisions. When coupled with the earnings data we have digested to date, this suggests that a narrative-free “glass half full” perspective remains appropriate for diversified portfolios. 

¹ Warren Buffet's Master Class on the Problem with Gold. CNBC. Accessed 6 February 2026. 

2 ECB Calls For Urgent Action From EU Leaders to Unlock Growth. Bloomberg. Accessed 6 February 2026.