Published February 20, 2026
The stock market so far in 2026 has shown us a couple of themes: 1) continuing investor preference for non-U.S. stocks, 2) investor preference for “late-cycle” sectors over growth-oriented sectors (shown in chart below).
Below we add to the analysis with some observations from The Chart Report:
“Today we’re examining the divergence between broker dealers and the Industrials sector. The broker dealer sector holds finance companies that are heavy in the private lending and investment banking space. Companies like Goldman Sachs, Morgan Stanley, and Charles Schwab.
Both groups act as bellwethers for economic activity, so this is an important development to monitor.
Let’s take a closer look.
These two have moved largely in lockstep since the beginning of this cycle.
Lately, however, broker dealers have decoupled.
This can largely be attributed to recent weakness in the financial sector. That weakness has been, in large part, driven by concerns about the large amount of private lending to software companies. The AI Scare Trade we spoke of recently has caused one financial company, Blue Owl Capital, to limit client withdrawals from their funds, a move that former PIMCO chief, Mohammad El-Erian, likened to the Bear Stearns fund move prior to the Great Financial Crisis (note that El-Erian made clear the current worries are nowhere near the magnitude of the GFC!).
On the other hand, industrials have continued climbing to new all-time highs driven in large part from the enormous capital expenditures flowing into data center building.
While they represent different industries, both are closely tied to the economic cycle.
Alongside Technology, broker-dealers and industrials serve as key barometers of overall market health.
A sustained divergence between these groups is worth noting. If broker dealers continue to lag, it could be an early signal of broader market caution.”
Market Update
Investors came back from the Monday holiday hoping to push the major indexes upward out of their months-long stupor. Tuesday saw flat trade with no market-moving information. Tech stocks bounced back Wednesday with a +0.8% gain for the Nasdaq. Earnings from software design company Cadence Systems and a chip deal between Meta and Nvidia may have helped put life into the struggling sector. But the index gave back -0.3% the following day with Iran-U.S. tensions pushing oil prices substantially higher for a second straight day. Walmart posted good earnings but offered a cautious outlook further limiting investor enthusiasm (the company’s shares fell almost -10% this week). Minutes of the recent meeting of the Federal Reserve showed a lack of appetite for near-term interest rate cuts, giving another headwind to the stock market. Nonetheless, tech stocks again found their footing Friday. The fourth quarter GDP report came in at 1.4% annual growth down sharply from the prior two quarters, primarily due to the government shutdown. The Supreme Court ruled against President Trump’s tariff program. Nonetheless, the Mag 7 stocks showed some life and were solid enough to push the S&P 500 higher by +0.7%.
Friday’s rebound in the Mag 7 stocks left the S&P 500 (SPY) higher by +1.13% for the week. The Nasdaq 100 (QQQ) rose +1.14% but still remains trapped in a tight trading range going back five months. Small cap stocks (IWM) continued a five-week streak of flat trading with a +0.63% move. By contrast, international stocks have moved higher for 13 consecutive weeks.
Warm wishes and until next week.