Markets Tumble on Inflation, War Fears

The hotter-than-expected inflation report was driven by a surge in wholesale services costs, which jumped 0.8% in January. A key factor was a 2.5% leap in "trade services," a category measuring profit margins for wholesalers and retailers, suggesting that costs from tariffs may be increasingly passed on to businesses and consumers. This core inflation measure, excluding food and energy, hit its highest annual rate in 10 months. Tensions in the Middle East have added a significant risk premium to oil prices, estimated to be between $4 and $10 per barrel. In response to the escalating conflict, forecasters in February raised their 2026 average price targets for Brent crude to $63.85 a barrel and for U.S. crude to $60.38. Any disruption to the Strait of Hormuz, a critical waterway through which about 31% of all seaborne crude oil passes, remains a primary concern for the market. The anxiety around Artificial Intelligence stems from fears that new "agentic" AI tools are beginning to dismantle traditional business models, particularly in the software-as-a-service (SaaS) sector. This concern, dubbed a potential "SaaSpocalypse" by some, intensified after product releases from firms like Anthropic, which can automate complex tasks in areas like legal contract review and coding. The sell-off in February saw the iShares Expanded Tech-Software Sector ETF (IGV) fall by about 30%. Citing the inflation surprise and a weakening U.S. dollar, UBS downgraded its outlook for U.S. stocks to "Neutral." The bank noted that U.S. stock valuations are stretched, with price-to-earnings ratios about 35% above their global peers. Furthermore, a key support for U.S. stocks has diminished, as buyback yields are now largely in line with the rest of the world.