"Gray skies are just clouds passing over." – Duke Ellington

Good evening, 

The S&P 500 slipped 1.39% this week, and the Nasdaq Composite fell still further, ending the week down 2.10%. Software stocks helped lead the indexes lower, as worries over whether AI would render many forms of software redundant maintained their presence on investors' wall of worry. As Fundstrat Head of Research Tom Lee put it, the story of "software eating the world," which we read repeatedly from 1980-2025, is now becoming one of "AI eating software."

From a technical analysis perspective, Head of Technical Strategy Mark Newton acknowledged that "software has struggled to stabilize and find a bottom, [and] they look like they're going straight down in the short run." Going forward, Newton told us that "I don't sense it's going to be an area to overweight within technology."

As he told us during our weekly huddle, however, the situation does not necessarily look so dire for those with more of an intermediate-term timeframe. "The intermediate-term charts help to put this deterioration into perspective," he suggested, and "I do sense that this group can bounce." 

Yet Lee views the current mood of the market as also related to the current rotation within the AI trade, away from the Magnificent Seven and toward companies in processors, chips, energy, and infrastructure. "This can make markets feel quite turbulent," Lee noted. Taking a look at market history, Lee sees a similarity between the current scenario and the situation with the initial building of nationwide wireless networks in the 1990s and early 2000s. In those days, investor appetite shifted between buying carriers and buying infrastructure and handset makers. "Back then, we'd call this 'buying the armies or buying the bullets,'" he told us. In a modern context, the current AI activity can be seen similarly, as investors shift behind the Magnificent Seven (the "armies") and those companies that make "bullets" – processor and memory-chip makers and those in the business of building out data centers, such as energy companies and related equipment makers. This dichotomy is illustrated in our Chart of the Week:

This arguably explains the current outperformance of energy/basic materials, commodities, industrials, memory, chipmakers," Lee said, but it does not necessarily mean underweighting or divesting from the "armies" of the Magnificent Seven, in his view. "At some point, this rotation will arguably shift again to Mag7," he told us. 

The longer view

Regardless of one's views on Kevin Warsh, President Trump's choice to succeed Jerome Powell as chair of the Federal Reserve, Newton noted that the changeover to a new Fed chair has historically tended to be followed by market uncertainty and short-term drawdowns. "The market's going to need an adjustment period to get used to the [new] Fed-speak," he pointed out, noting that "we have absolutely no idea what [Warsh's] communication style will be compared to Powell." (Warsh is still in the early stages of the confirmation process.)

Newton also sees a seasonality challenge. "The second year of a second term of a president has tended to coincide with challenging years for stock investors," he pointed out, a pattern that has largely held true going as far back as Harry S. Truman's second term.

This year, Newton expects the pattern to continue. Looking at the area around 7,150 for the S&P 500, Newton told us, "I don't think S&P is going to get above here for at least the spring. So I think that we have one final push that's going to happen over the next couple of weeks and it's going to be right to sell into that."

For the most part, this independently coincides with Lee's view. As he reiterated this week, Lee said, "We still think markets have enough tailwinds to get to 7,300, and then do think there's a drawdown that feels like a bear market this year. And then year-end we do finish stronger, in my view."

Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the February 2026 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology. 

Elsewhere

Alphabet issued a century bond – a bond with a term of 100 years. The Alphabet bond offers a 6.125% yield and is part of a larger fundraising effort that will be used to further advance the Google parent's buildout of data centers and related energy efforts. Demand was high for the bond, and the offering was massively oversubscribed. 

A federal grand jury rejected prosecutors' request to indict Democrats who produced and circulated a video reminding military servicemembers of their legal obligation to refuse to obey "manifestly illegal" orders. (It is not clear what charges the prosecutor, Jeanine Pirro, sought to bring.) The Trump administration has criticized the Democrats, including Sen. Mark Kelly of Arizona and Rep. Elissa Slotkin of Michigan for accurately citing a fundamental, longstanding tenet of the Uniform Code of Military Justice that governs all U.S. servicemembers. The president asserted that the reminder undermines the president's authority as commander in chief, encourages disorder and disobedience, and could amount to sedition.

Kraft Heinz said it would suspend plans to split the two formerly independent companies, with new chief executive Steve Cahillane viewing the problems arising from the troubled merger of the two food conglomerates as fixable and worth the attempt. The split was announced in September, and the merger took place in 2015. 

Abigail "Gail" Slater has been forced to step down as head of antitrust efforts for the Department of Justice. Slater, who had been championed by Vice President JD Vance, fell out of favor after a series of clashes with her direct boss, Attorney General Pam Bondi, generally as Slater pursued a less-business-friendly, more skeptical approach to reviewing proposed mergers than many in the Trump administration would have preferred. Omeed Assefi, who served as deputy under Slater, has been named acting head of the division.

The YouTube star known as Mr. Beast bought Step, a youth-focused financial services app, marking an expansion for his company, Beast Industries, beyond gaming and snacks. Mr. Beast, also known as Jimmy Donaldson, originally won fame and fortune with endurance-challenge and stunt videos on the streaming platform. Step, whose backers include Stripe, provides banking and investing services for young users (despite not being a bank itself).

Canada is in shock and mourning after one of the worst mass shootings in its history. Nine people, including the shooter, were killed in the tiny town of Tumbler Ridge, in the western province of British Columbia. The victims also include five children aged 12-13 and one teacher. Also found dead at the shooter's home were his mother and 11-year-old stepbrother. At least 27 others were wounded.  

North Korea's Kim Jong Un has picked his daughter Kim Ju Ae as his heir-apparent, according to South Korea's intelligence agency. Little is known about the younger Kim, who is believed to be in her early teens, but she has reportedly started to provide policy input and has frequently been seen beside her father in public.

And finally: The U.S. fell to its lowest-ever position in the Transparency International's Corruption Perceptions Index, a widely accepted measure of global corruption. The U.S. ranked 29th out of 182 in the latest rating, tied with the Bahamas. The United Kingdom also fell to its lowest-ever rank, 20th. At the top of the list (perceived as the least corrupt) were Denmark, Finland, and Singapore. The bottom (perceived as most corrupt) features South Sudan and Somalia (tied), and Venezuela.