Market Note: Navigating GDP Trends, Housing Recovery, and Tariff Rulings

ISG

February 26, 2026

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1. GDP and PCE: Progress but Still Sticky:

Last week’s focus centered on fourth-quarter GDP and PCE, two critical inputs for Federal Reserve policy given its dual mandate of labor market stability and price stability. Headline GDP rose 1.4%, below expectations, but the details were more constructive than the headline suggests. Approximately 1.15% of the drag stemmed from the government shutdown, which temporarily slowed federal spending. A cleaner measure of underlying demand, Real Final Sales to Private Domestic Purchasers, often referred to as “core GDP”, came in at a healthier 2.4%.¹

On inflation, PCE rose 2.9% year over year, with core PCE at 3.0%², both slightly hotter than expected. While these readings reflect ongoing stickiness, it is important to keep the broader trajectory in perspective. Headline PCE peaked at 7.2% in 2022, and core PCE at 5.6%³, meaning substantial progress has already been achieved. Inflation remains somewhat elevated, but it has moderated meaningfully from prior highs. From a corporate earnings standpoint, a modestly higher inflation environment paired with firmer growth remains preferable.

2. Additional Data Reinforce Economic Resilience:

Beyond GDP and PCE, last week’s data broadly reinforced the view that economic momentum remains intact. S&P Global PMIs for both manufacturing and services came in above 50, signaling continued expansion. Labor market indicators also remain firm, with weekly jobless claims at 206,000 and the four-week moving average at 219,000⁴, levels consistent with a stable employment backdrop. Industrial production rose 0.7% month over month, more than doubling expectations and pointing to improving output trends.

Housing data provided further encouragement. New home sales increased 3.8% year-over-year, while housing starts rose 6.2% month-over-month and permits climbed 4.3%.⁵ Mortgage rates have declined to 6.01%, the lowest level since September 2022 and well below the 8% levels seen two years ago. While a sustained housing rebound likely requires rates to move into the mid-5% range, activity is already showing early signs of stabilization. Given housing’s sensitivity to interest rates, continued easing in financing costs could become an incremental tailwind for growth.

3. Supreme Court Ruling on Tariffs:

The Supreme Court’s decision to rule against the Trump-era tariffs under IEEPA was widely expected and removes a near-term overhang that markets had been anticipating for several weeks. Approximately $175 billion in tariffs had been collected under that authority, and while the ruling provides clarity, it does not fully resolve the issue. Notably, the Court was silent on the refund process, leaving questions around which countries, sectors, or companies may be eligible, and deferred those details to lower courts. As a result, the path forward could be lengthy and procedurally complex.

The administration has signaled a potential “Plan B,” likely utilizing Sections 301 and 232, which allow for more targeted, sector or country-specific tariffs. In the near term, sectors that were disproportionately impacted, such as retail, semiconductors, autos, and auto parts, have responded positively, particularly retailers given their global sourcing exposure. Companies such as Apple, which have invested heavily to diversify supply chains away from China, will be closely watched for commentary on sourcing strategy and potential cost implications of domestic production.

While significant uncertainties remain regarding implementation and potential refunds, the ruling is constructive as it removes a widely anticipated event risk. To the extent tariff pressures ease, there could be modest relief on the inflation front, though tariffs were never the dominant driver of price dynamics. With inflation already well off its peak and gradually improving, the broader disinflation trend remains intact even as trade policy continues to evolve.

4. Fixed Income:

U.S. Treasury yields drifted modestly higher across the curve last week as markets absorbed a softer than expected fourth quarter 2025 GDP release, the Supreme Court’s decision to invalidate the administration’s tariff measures, and escalating geopolitical tensions involving Iran. By Friday’s close, the 2, 10, and 30-year yields had risen by 7, 4, and 3 basis points, respectively. Credit markets improved with spreads tightening across both investment-grade and high-yield sectors. Investment-grade spreads narrowed 2 basis points to +111, while high-yield spreads tightened 6 basis points to +342. In the municipal market, tax-exempt yields were lower by 1-3 basis points.⁶

Return for Selected Indices⁷:

1 Federal Reserve of St. Louis: As of February 20, 2026
2 Bureau of Economic Analysis: As of February 20, 2026
3 Bloomberg: As of February 20, 2026
4 Department of Labor: As of February 19, 2026
5 U.S. Census Bureau: As of February 19, 2026
6 Bloomberg: As of February 22, 2026
7 Source: Bloomberg. As of February 22, 2026