Markets Navigate Geopolitics and Tariff Crosscurrents as Growth Moderates

February 23, 2026

Financial Markets

U.S. equity markets finished higher in a holiday-shortened week, with trading compressed by the Presidents Day closure on Monday.

Market direction was shaped by two dominant forces: escalating geopolitical tensions and a landmark Supreme Court ruling on tariffs. Escalating U.S.–Iran tensions drove a risk-off tone midweek, as markets weighed the possibility of military action and potential disruptions to global oil supply. Energy prices responded quickly, with Brent crude moving above $70 per barrel, lifting the Energy sector and nudging inflation expectations higher.

However, sentiment improved materially on Friday following a 6–3 Supreme Court decision striking down the administration’s broad use of emergency powers under the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs. Retail and apparel company shares responded positively, while Treasury yields remained relatively steady, reflecting a balanced macro interpretation as investors weighed reduced tariff revenue against the potential growth implications of lower trade barriers.

Importantly, the relief was tempered by the administration’s swift response. President Trump announced that new global tariffs would be implemented under alternative statutory authorities, including Section 122 and ongoing Section 301 investigations, effectively replacing the invalidated measures through different legal channels. As a result, while the Court’s decision narrowed one pathway for broad tariff action, trade policy uncertainty remains a live variable for markets.

Despite the constructive finish, performance dispersion remained evident. Large-cap benchmarks edged higher for the week, while small-cap stocks lagged modestly, reinforcing a preference for scale and earnings visibility amid macro crosscurrents. International equity indices also advanced, continuing to build on last year’s relative strength, supported by currency dynamics and comparatively stable policy signals abroad.

Fixed-income markets reflected measured adjustments rather than alarm. Treasury yields were broadly stable even amid geopolitical escalation and tariff-related headlines, underscoring that long-term growth and inflation expectations remain anchored.

Economics

Economic data this week delivered a nuanced message: growth is moderating, inflation remains sticky, and activity remains uneven across sectors. The advance estimate of fourth-quarter GDP came in at 1.4%, below consensus expectations of 1.9% and well down from the prior quarter’s 4.4% pace. Growth was driven primarily by consumer spending and business investment, which together contributed more than two percentage points to the headline figure. However, a sharp contraction in government spending—declining at a 5.1% annualized pace, the steepest drop since 2020—subtracted meaningfully from overall growth, in part reflecting the effects of the prolonged government shutdown.

Inflation data were firmer. December headline PCE rose 0.4% month-over-month, slightly above expectations, while core PCE matched forecasts at 0.4%. On a year-over-year basis, headline PCE rose 2.9%, and core PCE reached 3.0%, the highest since March of last year. Services remain the primary driver of inflation pressures, though goods prices showed renewed firmness, with some analysts citing tariff pass-through effects.

In contrast to the softer GDP reading, January industrial production surprised to the upside, rising 0.7% month over month, well above expectations. Capacity utilization improved to 76.2%, signaling steady momentum in the manufacturing and industrial complex. This divergence reinforces the “two-speed” narrative—manufacturing activity is stabilizing, while broader growth moderates from prior peaks.

Importantly, markets interpreted the combination of softer GDP and firmer inflation as largely offsetting. Rate expectations were little changed, with futures markets continuing to price the first Federal Reserve rate cut around June.

Policy

Geopolitically, U.S.–Iran tensions remain a central driver of risk sentiment, but recent headlines suggest a tentative shift back toward diplomacy. After a week in which markets priced in the possibility of imminent U.S. military action, reports over the weekend indicated that negotiators are set to resume nuclear talks in Geneva on Thursday, contingent on Tehran submitting a new draft proposal by Tuesday—a development that may temper near-term escalation risks.

The administration continues to augment its military posture in the Middle East even as it maintains that diplomacy remains the preferred path, underscoring the dual track of pressure and negotiation. Discussion persists around Iran’s nuclear program and related confidence-building measures, with both sides signaling a willingness to engage even as substantial gaps endure. Oil markets remain sensitive to the evolving environment, with prices reflecting the market’s attempt to balance diplomatic prospects amid sustained regional tension.

On the trade front, the Supreme Court’s ruling against the administration’s broad tariff authority under IEEPA marked a significant institutional check on executive power. Chief Justice Roberts’ opinion emphasized that the statute’s language could not support such expansive authority without explicit congressional authorization. While the ruling does not immediately resolve questions about potential tariff refunds, it narrows the legal framework for future trade actions.

In response to the ruling, President Trump announced that a new global tariff would be implemented under Section 122 authority as a 15% “global tariff” that can remain in effect for up to 150 days. The administration also signaled that it will proceed with additional trade tools, including Section 301 investigations into unfair trade practices, Section 232 sectoral tariffs tied to national security, and, potentially, Section 338 actions against discriminatory trade policies. Unlike IEEPA, these authorities generally require formal investigations before implementation, potentially slowing the pace of new measures but not eliminating tariff risk altogether.

The ruling provides clarity on one front while simultaneously reopening uncertainty on how tariffs will be structured going forward. Markets responded positively to the legal clarity but remain attentive to how new tariff authorities may be deployed in the weeks ahead. Additionally, the Federal budget implications of changing tariffs will attract discussion on deficits and the growing U.S. debt service burden.

Conclusion

This week’s developments underscore the layered nature of the current investment landscape. Economic growth is moderating but remains positive. Inflation is cooling gradually but remains elevated. Industrial activity is stabilizing, while consumer dynamics remain steady but selective. Productivity gains linked to AI investment offer a potential structural tailwind, though confirmation will require time and stability.

Policy remains the dominant source of volatility. The Supreme Court’s tariff ruling reduced one key uncertainty but introduced new questions about implementation pathways and potential refund obligations. Meanwhile, geopolitical tensions, particularly in the Middle East, remain a latent risk, with energy markets serving as the most immediate transmission channel.

Markets appear cautiously optimistic. Equity indices are responding constructively to incremental clarity, but conviction remains tempered by macro and geopolitical crosscurrents. In this environment, diversification, quality exposure, and disciplined positioning remain essential. The expansion continues—but with narrower margins for policy error and greater sensitivity to headline risk.

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