Markets Sink on War and Inflation Fears

The hotter-than-expected inflation reading was driven by a surge in the cost of services. The Producer Price Index for final demand services jumped 0.8% in January, the largest monthly increase since July 2025, while the index for goods actually declined 0.3%. Digging deeper, the main culprit was a 2.5% jump in trade services margins, which reflects the profits of wholesalers and retailers. This suggests companies may be passing on higher costs through the supply chain. Meanwhile, an 80% of the drop in wholesale goods prices was attributable to a 5.5% decline in the gasoline index. The military escalation involves a joint U.S.-Israeli offensive against Iran that began on February 28, 2026, with strikes reported in multiple cities including Tehran. The stated U.S. objective is to destroy Iran's military and missile capabilities and prevent it from obtaining nuclear weapons. In retaliation, Iran's Revolutionary Guard has launched missile and drone attacks targeting northern Israel and U.S. military bases throughout the Middle East, including installations in Bahrain, Kuwait, and Qatar. This follows a 12-day air war between Israel and Iran in June 2025, and weeks of heightened anxiety that led some nations to evacuate embassy personnel. February's market decline was the worst monthly performance for the S&P 500 in 11 months, closing the month down roughly 0.9%. The tech-heavy Nasdaq Composite fared worse, losing about 5.1% for the month. In its downgrade of U.S. stocks, UBS cited concerns beyond just inflation. The bank noted that U.S. stock valuations are stretched, with price-to-earnings ratios standing about 35% above their global peers. The investment bank also pointed to a weakening U.S. dollar as a headwind for American equities. UBS strategists forecast the euro will rise to $1.22; historically, a 10% drop in the dollar causes U.S. stocks to underperform global markets by approximately 4%.