Growth cools, but risk assets bounce

Last week in markets

Last week delivered softer growth, firmer inflation prints, and a big policy headline that markets treated like a pressure valve. Real GDP growth slowed sharply in the fourth quarter to 1.4% (annualized), but the details still showed a persistent consumer-led economy. Friday’s Supreme Court tariff decision eased one near-term inflation risk, even as the Fed minutes signaled to investors a higher bar for additional cuts.

The S&P 500 rose 1.1% for the week and is also up 1.1 for the year. Rates were steadier than the headlines. The Treasury curve nudged higher through Thursday: the 10-year gained four bps to 4.08%.

The tariff ruling reshapes the near-term outlook

On February 20, 2026, the Supreme Court ruled 6-3 that the sweeping tariffs imposed under the International Emergency Economic Powers Act exceeded executive authority. Writing for the majority, Chief Justice John Roberts concluded that the 1977 law permits regulation of commerce during national emergencies but does not authorize the unilateral imposition of taxes or duties, authority reserved to Congress under Article I of the Constitution. The ruling invalidated the so-called Liberation Day reciprocal tariffs and those tied to immigration and drug trafficking. The decision could require the federal government to refund more than $160 billion in collected duties. In response, President Trump invoked Section 122 of the Trade Act of 1974 to raise a global tariff to 15%. That authority is limited to 150 days without congressional approval. For markets, even though one significant inflation risk was reduced, trade policy uncertainty has not disappeared.

Slower headline GDP, steadier private demand

The Bureau of Economic Analysis (BEA) advance estimate showed real GDP increasing 1.4% annualized in Q4 2025. Real final sales to private domestic purchasers rose 2.4%, signaling that the private demand “heartbeat” hasn't flatlined. Importantly, the BEA estimated that the October to November 2025 government shutdown reduced fourth-quarter growth by roughly 1.0 percentage point.

PCE: income and spending keep moving

December’s Personal Income and Outlays report showed personal income rising 0.3% and personal consumption expenditures increasing 0.4%. In real terms, spending rose 0.1%, while the personal saving rate held at 3.6%. On inflation, headline and core PCE both increased 0.4% month-over-month. While this is not runaway inflation, it is certainly not a green light for the Fed to cut rates.

Fed minutes underscore policy tension

The January 27 to January 28 FOMC minutes reflected a committee focused on preserving flexibility. Almost all participants supported holding at 3.50% to 3.75%. Two preferred a cut. Several emphasized that future guidance should acknowledge the possibility of hikes if inflation remains above target.

Two themes stand out for capital markets. First, participants cited tariff increases as contributing to higher core goods inflation, a reminder that inflation can re-accelerate even if shelter cools. Second, the minutes highlighted familiar late-cycle vulnerabilities: elevated asset valuations, historically tight credit spreads, and increased scrutiny of private credit and opaque financing structures linked to AI-related investment.

The week ahead

This week brings several Federal Reserve speeches and key data releases. Governor Waller, Vice Chair Bowman, and other officials are expected to address the outlook for monetary policy, particularly the balance between persistent inflation and labor market resilience.

On the data front, December factory orders and home prices are scheduled for release. Many analysts view Tuesday’s February consumer confidence report and Friday’s January PPI as the most consequential. Together, they will help refine expectations for the path of core PCE inflation.