How Oil Prices and AI Are Shaping Stock Market Sector Performance

Sean Gross, CFP®, AIF® | Co-Founder & CEO

When thinking about the stock market, many investors naturally gravitate toward an index like the S&P 500. While this is a reasonable starting point, it can be especially valuable to look one level deeper at the individual sectors that make up the index. The 11 sectors of the S&P 500, for example, each carry distinct characteristics and can respond very differently to shifting economic conditions and geopolitical events. Gaining an appreciation for these dynamics plays an important role in portfolio construction, diversification, and long-term financial planning.

In the current environment, the spread between the top and bottom performing sectors has expanded to more than 40 percentage points this year. This notable divergence has been shaped by the ongoing conflict in the Middle East, fluctuations in oil prices, and the rapidly changing narrative surrounding AI.

The S&P 500 also recently experienced its first pullback exceeding 5% from its all-time high, even as 6 of the 11 sectors remain positive on the year. This divergence is possible because the S&P 500 does not assign equal weight to all sectors — Technology currently accounts for nearly one-third of the index, while Energy and Utilities represent just 3.5% and 2.5%, respectively. Of course, while past performance does not guarantee future results, history demonstrates that conditions can shift rapidly and that markets have often recovered when least expected.

Although recent market dynamics have been meaningful, the reality is that sector-level behavior varies every year. A longer-term perspective reveals that many sectors have delivered strong performance over the past several years, frequently surprising investors in the process. This serves as a reminder that maintaining balance across sectors is just as important as diversifying across asset classes. With that in mind, what context is needed to make sense of the recent sector rotation and market pullback?

The energy sector has surged amid geopolitical uncertainty

Geopolitical risks have provided a meaningful tailwind for the energy sector in 2026, with gains of approximately 30% year-to-date. This strong outperformance has been fueled by a sharp increase in oil prices, with Brent crude holding above $100 per barrel in the wake of escalating tensions in the Middle East. As the situation continues to develop, further market volatility remains possible. Nevertheless, this environment has pushed energy stocks considerably higher — a pattern that has historically repeated itself during periods of geopolitical conflict.

A notable example occurred in 2022, when Russia’s invasion of Ukraine propelled the energy sector to a 65.7% gain for the full year, even as the broader S&P 500 declined by 18%. The prior year, energy returned 54.6% as the global economy emerged from the pandemic. While broader markets eventually recovered from these historic episodes, they underscore how energy stocks have historically functioned as a counterbalancing force during periods of global uncertainty.

Although oil prices initially rose this year due to the blockage of the Strait of Hormuz — which compelled many Middle Eastern nations to curtail oil and gas production — more recent developments have seen attacks targeting energy production infrastructure directly. Elevated oil prices benefit producers by increasing revenues and incentivizing further investment and exploration.

At the same time, higher oil prices create headwinds for the broader economy in the near term by increasing costs for consumers, businesses, and many industries. This explains why the same shock that lifts energy stocks can weigh on transportation, consumer spending, and corporate profit margins in other areas of the market.

Taking a longer-term view, there are reasons to temper excessive pessimism about elevated oil prices. Between 2011 and 2014, oil prices sustained levels near $100 per barrel, yet the economy continued to expand and equity markets maintained their upward trajectory. Economists frequently characterize such events as “supply-side shocks” that tend to be temporary in nature, as production is eventually restored and alternative suppliers emerge to fill the gap.

Notably, the U.S. has held its position as the world’s largest oil producer for six consecutive years, with output now surpassing 13.7 million barrels per day. The U.S. is widely regarded as a “swing producer,” meaning that increased domestic production can help offset shortfalls elsewhere. This capacity can help moderate prices over time and reduce the economy’s exposure to disruptions in foreign supply.

AI has raised new questions about technology companies

Over the past several years, AI-driven stocks propelled the market higher, generating substantial gains across sectors including Information Technology, Communication Services, and Consumer Discretionary. The extended outperformance of these sectors — including the so-called Magnificent 7 — has led to increased market concentration and heightened sensitivity to a relatively small group of companies.

More recently, however, the story has evolved. While these companies continue to report strong earnings, a broader range of sectors has performed well over the past year, including Energy, Industrials, Utilities, Materials, and Consumer Staples. Several of these groups are considered more “defensive” in nature and have benefited from the current market environment.

Part of the shifting narrative around technology stocks reflects growing concerns about how AI may affect established software business models. Some observers have referred to this as the “SaaS-pocalypse” — the notion that AI tools could disrupt traditional software-as-a-service (SaaS) companies. This debate remains ongoing, and whether these concerns ultimately prove warranted, they have already contributed to a reassessment of technology sector valuations.

This rotation does not imply that technology stocks have lost their relevance. Rather, it illustrates how swiftly market leadership can change. This is precisely why investors should be cautious about allowing portfolios to become overly concentrated in any single sector, regardless of how compelling the growth outlook may appear at a given moment. Ultimately, the purpose of a portfolio is not to chase the best-performing index, sector, or individual stocks, but to generate sound returns across market cycles in support of long-term financial plans.

Defensive sectors and broader diversification have supported portfolios

 As uncertainty increased in recent months, markets gravitated toward traditionally defensive sectors such as Utilities, Consumer Staples, and, to a lesser degree, Health Care. This defensive positioning had already been building before the most recent escalation in the Middle East, suggesting that investors were already adopting a more cautious stance in response to concerns surrounding AI.

Defensive sectors tend to hold up relatively well when uncertainty and market volatility increase. This is not because these companies are suddenly delivering exceptional financial results, but because their cash flows are generally more stable and less reliant on a robust economic cycle. Utilities continue to collect payments, consumers continue to purchase everyday goods, and healthcare remains a necessity regardless of geopolitical events. These sectors also tend to offer above-average dividend yields, on average. This relative predictability is what makes them more appealing when markets begin to express concerns about growth or inflation.

A related concept that has gained traction for describing stocks less exposed to AI disruption is “heavy assets, low obsolescence,” or HALO. These tend to be companies that are defensive in character and rely on physical goods or manufacturing processes that are not easily disrupted by emerging technologies.

Just as with asset classes, predicting which sector will lead or lag in any given year is an exceptionally difficult task. The sector that tops the performance rankings one year frequently finds itself near the bottom the next. Technology’s recent challenges, for instance, follow an extended stretch of market leadership. This inherent unpredictability reinforces why maintaining broad sector exposure is so essential.

A well-diversified portfolio that spans cyclical sectors such as energy, growth-oriented sectors such as technology, and defensive sectors such as utilities and consumer staples is better equipped to navigate a variety of market environments. Rather than attempting to time sector rotations — which is just as counterproductive as trying to time the broader market — investors are better served by holding a balanced portfolio capable of participating in gains across different parts of the economy while managing overall risk.

The bottom line? The S&P 500’s performance this year is a reminder that maintaining balance across sectors is a key principle of long-term investing. Having exposure to many parts of the market is the best way to keep portfolios aligned with financial goals.

Special Report: Iran, Oil, and Your Portfolio

Sean Gross, CFP®, AIF® | Co-Founder & CEO

War is, first, a human tragedy—the comments below focus strictly on market observations so you can stay disciplined amid all of the noise.

The situation in the Middle East continues to evolve, and the safety of civilians in the region and our troops remains the most important consideration. That said, we also believe it’s important to look at the financial market implications to provide perspective on what this means for markets, oil prices, and your portfolio. 

Following the U.S. and Israel’s strikes on Iran, oil prices increased, pushing stocks and bonds slightly lower. This is consistent with other Middle East conflicts, where oil price spikes are often a primary driver of market moves. 

The scope of the latest strikes is broader than previous engagements. However, history also makes it clear that these conflicts are not always a catalyst for lasting market movements. While there have been many global crises and conflicts over the past several years, oil prices are still well below their 2008 and 2022 peaks. This demonstrates why making dramatic portfolio changes in response to geopolitical events can be counterproductive.

While the scale of the current strikes is significant, tensions between the U.S., Israel, and Iran have been escalating for some time. This latest development follows a month-long U.S. military buildup in the region and failed negotiations over Iran's nuclear program.

Looking from a broader perspective, from World War II to the Gulf War, markets often experienced short-term volatility but were driven by economic fundamentals over the long run. More recently, conflicts in the Middle East but did not derail the long-term market trajectory.

The process of building a portfolio and creating financial plans is designed precisely to manage this uncertainty. While each event is unique, financial markets have navigated countless wars, crises, and regional conflicts. The key for long-term investors is to separate headline noise from investment decisions. 

Oil prices and the Strait of Hormuz

For investors, the most direct way that Middle East conflicts affect financial markets is through oil prices and global trade. Iran sits along the Strait of Hormuz, the world's most critical energy waterway. 

A key question is whether Iran has the means or willingness to cause long-lasting disruption to the Strait of Hormuz, as this could have implications for global energy markets. Oil prices had already been rising in anticipation of the strikes.

However, perspective is needed. Current oil prices remain far below the 2022 peak of nearly $128 per barrel when Russia invaded Ukraine. The U.S. is also now the world's largest producer of oil and natural gas. While the U.S. still relies on global energy markets, this level of production helps insulate the domestic economy from supply disruptions.

Staying invested through uncertainty

For long-term investors, the most important lesson from past geopolitical conflicts is the value of staying invested. It's natural to feel uneasy when headlines describe military strikes and the possibility of a wider regional war. These events involve real human consequences and are unlike typical market news about earnings and economic data.

It's also important to note that Iran plays a minimal direct role in most investment portfolios. The country has been under heavy sanctions for years, limiting its participation in global financial markets. The indirect effects through oil prices and broader uncertainty are more relevant than any direct exposure.

This doesn't mean markets won't experience volatility in the coming days and weeks. Uncertainty around the duration and scope of the conflict could weigh on investor sentiment, but markets can rebound quickly and unexpectedly.

We are watching the situation carefully and will keep you informed if anything material changes regarding your portfolio. We are here for you, especially during times like these, so please don’t hesitate to reach out if you have any questions.

May God bless America, protect our troops, and bring lasting freedom to the Iranian people.

Guest Article: Supreme Court Tariff “Bomb”? Fears of a $200 Billion Refund Shock Are Overdone

Introductory note: TWM occasionally shares articles, with permission, from trusted professionals whose work we are familiar with. When doing so, we are careful to choose well-researched articles which offer challenging, thought-provoking, and often non-consensus1 insights. The following article is authored by economist, DanielLacalle, PhD. More information on Danielle and his work can be found here.

Daniel Lacalle 

February 22, 2026

The market consensus reaction to the Supreme Court ruling on the Liberation Day tariffs exaggerates the negatives and ignores the options of the Trump administration.

Markets are overreacting to headlines about a $175–200 billion tariff refund financial hole. However, the Supreme Court ruling opens a long, narrow, and manageable process, not an imminent fiscal crisis.

In the days after the Supreme Court struck down the Trump Liberation Day tariffs, many sell-side analysts turned a complex legal ruling into a simple story, stating that Washington would soon have to repay up to $200 billion. Risk premiums in Treasuries ticked higher, gold and silver soared and some commentators warned about a looming refund shock for the U.S. budget that would make government debt soar.

Could the Supreme Court ruling imply that the Treasury is required to repay every dollar collected since these tariffs were introduced? The reality is far more complex.

The US administration has many options to maintain its trade policy.

The Supreme Court does not rule illegal any of the agreed-upon trade deals nor the tariff mechanisms. The Biden, Obama, Bush, and Clinton administrations have all implemented tariffs in the past. Furthermore, if any country decided to reject the deals that have been signed, which is unlikely, the administration can use Section 122 of the 1974 Trade Act to impose 10% tariffs for 150 days, which is what has been announced this week. This subsection allows tariffs or import surcharges when there is a balance of payments-related emergency. Furthermore, Section 338 of the 1930 Tariff Act allows tariffs as high as 50% on countries that discriminate against U.S. commerce, while Section 232 uses Commerce Department investigations to impose duties on specific products, and Section 301 targets countries and sectors after USTR investigations into unreasonable practices.

All administrations have used these mechanisms in the past. In fact, Biden kept all the tariffs that the first Trump administration imposed.

When we look at the Supreme Court decision, it is more about how tariffs were announced, not the mechanics of trade litigation and tariffs.

The risk of a repayment of collected tariffs exists, but the timeline is long, the effective amount is likely much smaller than $200 billion, and the U.S. economy can easily absorb it. In fact, the outcome of the Supreme Court decision may be no change at all in the existing trade deals.

The mainstream consensus has written extensively complaining about Trump’s tariffs. However, I have read nothing about the EU’s CBAM (Carbon Border Adjustment Mechanism) system, which is a massive tariff scheme designed to only go up in price. The CBAM is the most protectionist scheme seen in global trade in years, hidden under the “carbon” excuse to impose a monster tax system.

Tariffs are not Trump’s invention; they are the norm in global trade. The current trade deals have proven to be positive for global trade, growth, and all parties involved. Cancelling these deals would be exceedingly negative for all exporting nations. Furthermore, a global 10% tariff under Section 122 could yield $300–400 billion per year, compared with the current customs revenue of over $200 billion in 2025 and $77 billion in 2024.

Countries that have signed trade deals with the U.S. should know better than to break the existing agreements, as the new tariffs post-Supreme Court ruling would rise, and no new administration would change that, as happened with Biden.

The Supreme Court ruled the specific use of emergency powers (IEEPA) to impose certain tariffs unlawful but did not issue an order to refund collected duties.

The ruling creates a pathway for challenges, according to trade lawyers, but it does not mean the government must return every dollar. There is a huge difference between finding that a measure was unlawful and an enforceable ruling for every affected importer to receive a refund. 

Only exporters that preserved their rights, including protests, suspensions of liquidation, and timely filings, can realistically claim refunds. Most businesses will likely choose not to litigate. Furthermore, most of the value chain has already absorbed the cost of tariffs, providing little incentive for them to fight. 

There is an enormous difference between the total amount of tariffs collected, around $200bn, the legally claimable and filed amounts, and the refunds after litigation, settlements, and denials.

For exporters, attempting to claim the collected duties could be a daunting legal challenge and a risky business decision, as it could result in losses exceeding their claims.

Cases will now go back to the Court of International Trade and lower courts. Each claim must be processed, argued, and decided, and there will be appeals. Trade and customs disputes can take years. What some banks treat as a headline figure ($200 billion refund) is likely to end as a much smaller, probably nonexistent, netted-out fiscal cost. Furthermore, many of these businesses will likely face the risk of losing access to the lucrative US market during the lengthy and complex litigation process.

Even if the net refund were $100–150 billion, divided over three to five years, it would average $20–50 billion annually. Insignificant in budget terms. 

At more than $30 trillion in GDP, even a $150 billion refund amounts to barely 0.5% of the US output. Furthermore, the imposition of a 10% global tariff would generate more than $300 billion per year, according to estimates, which is 50% larger than the amount claimed by headlines as a possible refund.

Meanwhile, the US economy is strengthening, with fourth-quarter private sector GDP rising 2.4% thanks to robust consumption and investment, while government spending is falling, which deducts a percentage point from GDP but is a policy decision to control debt and deficits; inflation is declining and job creation is accelerating, with the manufacturing sector in expansion.

Investors may fear legal uncertainty around trade policy, but not a one time refund. For all the talk of a $200 billion black hole, the true risk is a prolonged period of legal wrangling, shifting tariff measures, and noise in trade data, not a fiscal cliff. That is why I believe that trade partners will prefer to maintain existing deals rather than to enter a long and painful litigation process that may end with a higher tariff bill for exporters.

1Non-consensus insights are contrarian, high-conviction, and typically unpopular ideas which often prove correct over time.

February 2026 Market Chartbook

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Click here to view our February 2026 Market Chartbook.

February Market Review: How the Supreme Court Tariff Ruling, AI, and Iran Shaped Markets

March 3, 2026

Sean Gross, CFP®, AIF® | Co-Founder & CEO

February served as a timely reminder that markets rarely move in a straight line. After January's positive momentum pushed major indices to record highs, sentiment shifted in response to a landmark Supreme Court ruling on tariffs, uncertainty surrounding artificial intelligence, softer-than-expected labor market data, and significant escalations in the Middle East. At the same time, international equities and small-cap stocks continued to outperform their domestic large-cap counterparts, and bonds posted further gains—underscoring the enduring value of a well-balanced portfolio.

Although headlines can drive short-term volatility, the broader economy remains on solid footing and corporate earnings continue to expand. Rather than reacting to any single development, investors are best positioned by maintaining a flexible, diversified portfolio that reflects their long-term financial goals.

Key Market and Economic Drivers in February

• The S&P 500 fell -0.9% and the Nasdaq Composite dropped -3.4% for the month. Meanwhile, the Dow Jones Industrial Average rose 0.2%.
• The CBOE VIX volatility index increased to 19.9 at the end of the month due to AI-related concerns and trade policy uncertainty.
• International developed markets jumped 4.5% based on the MSCI EAFE Index in US dollar terms, while emerging markets gained 5.4% based on the MSCI EM Index. Year-to-date, they have gained 9.9% and 14.6%, respectively.
• U.S. small cap stocks gained 0.7% based on the Russell 2000.
• The 10-year Treasury yield ended the month lower at 3.95%. This is the first month it has fallen below 4% since last November. The Bloomberg Aggregate Bond Index rose 1.6%.
• Gold closed lower at $5,279 per ounce but reached as low as $4,661 at the beginning of the month. Silver ended lower at $93.79 per month.
• The U.S. dollar index rose slightly to 97.6.
• January inflation showed headline CPI at 2.4% year-over-year and core CPI at 2.5%, while the core PCE price index rose 0.4% month-over-month, the sharpest increase in a year.
• The unemployment rate edged down to 4.3% in January, with 130,000 nonfarm payroll jobs added. However, annual benchmark revisions showed the economy created only 181,000 jobs in all of 2025, roughly 15,000 per month.
• On February 20, the Supreme Court ruled against the administration’s use of IEEPA-based reciprocal tariffs, prompting a pivot to alternative trade laws.
• On February 28, the U.S. and Israel launched military strikes against Iran, including the compound of Iran’s Supreme Leader who has been reported killed.
• The S&P 500 fell -0.9% and the Nasdaq Composite dropped -3.4% for the month. Meanwhile, the Dow Jones Industrial Average rose 0.2%.
• The CBOE VIX volatility index increased to 19.9 at the end of the month due to AI-related concerns and trade policy uncertainty.
• International developed markets jumped 4.5% based on the MSCI EAFE Index in US dollar terms, while emerging markets gained 5.4% based on the MSCI EM Index. Year-to-date, they have gained 9.9% and 14.6%, respectively.
• U.S. small cap stocks gained 0.7% based on the Russell 2000.
• The 10-year Treasury yield ended the month lower at 3.95%. This is the first month it has fallen below 4% since last November. The Bloomberg Aggregate Bond Index rose 1.6%.
• Gold closed lower at $5,279 per ounce but reached as low as $4,661 at the beginning of the month. Silver ended lower at $93.79 per month.
• The U.S. dollar index rose slightly to 97.6.
• January inflation showed headline CPI at 2.4% year-over-year and core CPI at 2.5%, while the core PCE price index rose 0.4% month-over-month, the sharpest increase in a year.
• The unemployment rate edged down to 4.3% in January, with 130,000 nonfarm payroll jobs added. However, annual benchmark revisions showed the economy created only 181,000 jobs in all of 2025, roughly 15,000 per month.
• On February 20, the Supreme Court ruled against the administration’s use of IEEPA-based reciprocal tariffs, prompting a pivot to alternative trade laws.
• On February 28, the U.S. and Israel launched military strikes against Iran, including the compound of Iran’s Supreme Leader who has been reported killed.

A Supreme Court ruling reshapes trade policy

The most consequential policy event in February was the Supreme Court’s February 20 ruling against the administration’s tariffs. Originally enacted under the International Emergency Economic Powers Act (IEEPA) to impose reciprocal tariffs on most trading partners, the decision carries broad implications—including the potential for refunds to businesses and consumers.

In response to the ruling, the White House swiftly moved to implement tariffs under a different legal basis—Section 122 of the Trade Act of 1974—which grants the president authority to impose tariffs of up to 15% for 150 days. These new import duties took effect on February 24. The administration is also expected to pursue additional measures, including Section 301 of the Trade Act of 1974 for addressing unfair trade practices and Section 232 of the Trade Expansion Act of 1962 for national security-related restrictions.

For investors, the key takeaway is that while the legal framework underpinning tariffs has changed, the overall policy direction has not. Trade uncertainty will continue to generate headlines and contribute to market volatility. However, history suggests that markets tend to adapt to new trade realities over time, particularly as companies reconfigure their supply chains and refine their pricing strategies.

The Treasury yield curve reflected some of this uncertainty, with the 10-year yield briefly dipping below 4% for the first time since November. This dynamic provided a tailwind for fixed income portfolios in February, reinforcing the important role bonds play in a balanced investment approach.

AI enthusiasm versus valuations

Artificial intelligence remained a central theme in market conversations throughout February, though the narrative evolved from concerns about elevated valuations to a broader debate about the speed and scale of disruption to existing business models. Some investors have grown wary that AI agents could compress software margins, accelerate the automation of white-collar roles, and upend traditional business models more rapidly than anticipated.

These concerns have helped fuel a notable rotation in markets. Investors have been moving away from mega-cap technology stocks and toward sectors viewed as more resilient to disruption—including energy, materials, and industrials. This shift, sometimes characterized as a move toward "heavy assets, low obsolescence" (HALO) companies, helps explain why the Nasdaq lagged while other areas of the market moved higher.

While market volatility can be unsettling, this rotation represents a constructive development for long-term investors who have been mindful of elevated equity valuations.

Growth cooled while the labor market sent mixed signals

According to the Bureau of Economic Analysis, real GDP grew at an annualized rate of 1.4% in the fourth quarter of 2025, a notable deceleration from the 4.4% pace recorded in the prior quarter and below the market consensus estimate of 2.5%. The slowdown was attributable in part to the record-long government shutdown and a pullback in consumer spending. That said, business investment expanded at an annualized rate of 3.7%, driven by record-setting capital commitments to AI data centers. For the full year 2025, real GDP grew 2.2%, which is a healthy pace by historical standards.

Conditions in the labor market sent more mixed signals. Although the unemployment rate ticked down to 4.3% in January, annual benchmark revisions from the Bureau of Labor Statistics revealed a considerably weaker employment picture. The economy added only 181,000 jobs over the course of 2025, or approximately 15,000 per month.

This has prompted some economists to characterize the current environment as one of "jobless growth"—a scenario in which the economy expands but job creation fails to keep pace. The divergence between GDP growth and employment has been widening since mid-2022, raising questions about the quality and breadth of the current expansion.

International stocks and small caps led the way

One of the most notable features of February’s market environment was the continued outperformance of asset classes beyond U.S. large-cap equities. International developed markets rose nearly 5% for the month, while emerging markets gained over 5%. U.S. small caps delivered their strongest monthly performance since August, with the Russell 2000 surging roughly 5% year-to-date—far outpacing the S&P 500.

This broadening of market returns is meaningful for diversified investors. After several years during which a small handful of large U.S. technology companies accounted for the bulk of market gains, the rotation toward international equities, small caps, and cyclical sectors suggests investors are identifying opportunities across a wider range of assets. A softer U.S. dollar earlier in the year also provided a boost to international returns when translated back into U.S. dollar terms.

Precious metals extended their strong performance as well, with gold and silver rising 6.8% and 8.1%, respectively. These gains reflect a confluence of geopolitical uncertainty, central bank buying, and concerns about fiscal deficits. While precious metals can serve a role in diversified portfolios, January’s sharp reversal is a reminder that they are not immune to significant price swings.

A major development at the close of February was the escalation of the U.S.-Iran conflict, which intensified following military strikes across the Middle East and reported deaths of several of Iran’s key leaders. While the situation continues to unfold and geopolitical uncertainty can weigh on investor sentiment, history demonstrates that remaining invested has consistently proven to be the most effective approach to navigating such periods.

The bottom line? February’s weakness in U.S. equities was offset by strength in international markets, small caps, and bonds. While AI developments and trade policy uncertainty are likely to remain in focus, the broadening of market leadership represents an encouraging sign for long-term investors.