FEBRUARY 2026 Newsletter: Productivity Gains Pave Way for a Federal Reserve Leadership Transition

Other than the historical volatility in gold and silver prices, the biggest news for markets in January may have been the nomination of Kevin Warsh as the next Federal Reserve (Fed) Chair. We anticipate a Warsh-led Fed will be able to steer the Federal Open Market Committee (FOMC) toward two rate cuts later this year, with help from easing inflation pressure. Remember, the Chair just gets one vote on the 12-member FOMC, so the health of the labor market and the path of inflation will be critical.

Warsh's track record of flexibility on interest rate policy, his credibility with Fed officials, and prior advocacy for central bank independence should help ease concerns about the President's influence. However, his preference for smaller Fed balance sheet, now over $6.6 trillion, and his emphasis on fiscal responsibility could complicate the Treasury's efforts to refinance government debt at lower rates. This dynamic will be important to watch because the U.S. government's fiscal situation is not on a sustainable path.

One of the reasons Warsh is likely to push for lower rates, despite still-elevated inflation, is productivity gains from AI can help the economy grow faster with less inflation. Recent data shows U.S. nonfarm business productivity rose 4.9% in the third quarter of 2025, strong enough to counter inflationary pressures even amid solid economic growth. Technology and more efficient processes enable firms to produce more with fewer hours worked, a key reason economic growth will likely help push stocks higher.

AI investment is also helping drive a strong fourth quarter earnings season. S&P 500 companies are on track to deliver a fifth consecutive quarter of double-digit earnings growth. While this is driven mostly by the tech sector's 30% earnings increase, keep in mind industrials are tracking toward 25% earnings growth. Several leading companies have cited tangible benefits of AI during earnings season, including Bank of America, Meta, and Costco. Strong earnings can help solidify the floor under stock prices, while cooling inflation and stable interest rates can help raise the ceiling by supporting higher valuations.

Looking ahead, the backdrop for stocks remains favorable. Massive AI investment is driving gains in productivity and earnings. Consumers will get tax refunds associated with the One Big Beautiful Bill Act starting this month. Positive stock market performance in January often bodes well for annual returns, though past performance does not guarantee future results. And increased participation in this bull market is encouraging - that average stock has outperformed the S&P 500 Index over the past three months.*

AI scrutiny, deficit spending, and geopolitics remain key risks. New Fed chairs are often tested by markets, and midterm election years tend to be more volatile. Don't let any volatility that may come along shake your confidence. We believe volatility creates opportunity. Stay invested and diversified.

As always, please feel welcome to reach out to our office with questions. And, we sincerely thank you for your continued trust and business.

^{*The average stock is the equal weight version of the S&P 500. Return for the equal weighted S&P 500 over the past three months (since 11/03/25) is 6.7% vs. 2.1% for the regular S&P 500 over that period.}

 ^{Tracking #1058651 | #1058652 (Exp. 02/2027)} 

• If you have not yet received your 2025-26 tax forms in the mail, most forms will be available through yourAccount View profile("Documents" top menu item, the "Tax Forms") by February 14, 2026, and most 1099s will be mailed by February 20, 2026. For more detailed information please review theTax Season 2025-26 section of our FAQ page.
  
  
• Did you know? The "Tools" menu itemon our website is a great resource for referential information. Outside of a comprehensive look atAccount ViewandWealth Vision, this section of our website offers:
  • Financial Calculators- Retirement, Insurance, Estate, Investment, Money and Tax calculators.
  • Alphabetized Glossary- a list of financial terms for your quick reference
  • Tax Tools- IRS 2026 tax deadlines, IRS tax forms, IRS tax publications, IRS tax rates.
    
    
• It is with much appreciation for your overwhelming dedication and support that Rick West has been once again named as a Five Star Wealth Manager Award recipient for 2026! Rick's profile will appearon the Five Star Professional site, as well as receive recognition inBoston Magazineand theWall Street Journalin March, andFortunemagazine in early summer. Five Star Wealth Managers are named using an in-depth research methodology that includes ten objective criteria, as described in the video below. Please join is in congratulating Rick on receiving this prestigious award!

Need Last Year's Tax Returns?

Help is available for taxpayers who need tax information for prior years but do not keep copies of their returns. There are ways to get the information you need.

Keep in mind the Internal revenue Service (IRS) recommends that taxpayers keep copies of their returns and any documentation for at least three years after filing:

• Ask your software provider or tax preparer. This is often the easiest way to get a copy of your tax returns.
  
  
• Order a tax transcript. Taxpayers who cannot get a copy of a prior-year return may order a tax transcript from the IRS. This document partially masks personally identifiable information such as names. addresses, and social security numbers to protect taxpayers' identities. All financial entries, including the filer's adjusted gross income, are visible. These are free and available for the most current tax year after the IRS has processed the return. People can also get these records for the past three years.
  
  
• Pay for a copy from the IRS. As a last resort, you can purchase a copy of your tax return from the IRS.

^{This information is not a substitute for individualized tax advice. Please discuss your specific tax issues with a qualified tax professional.} 

^{Tip adapted fromIRS.gov}

Tax Season is Here - Common Scams to Watch For

As tax season gets underway, reports of tax-related scams tend to rise right along with it. Fraudsters often impersonate the IRS or state tax agencies via emails, texts, phone calls, or social media messages that appear official.

Common red flags include messages claiming a refund has been approved, warnings about unpaid taxes, or requests to “verify” personal or financial information. Government agencies generally do not initiate contact this way, and clicking links or sharing details can expose sensitive information.

Staying aware of these tactics may help reduce the chance of identity theft or fraudulent activity during filing season. If something feels off, it’s worth taking a moment to pause before responding.

^{Tax season is here — don't fall for these common scams - CBS News}

^{This information is not a substitute for individualized tax advice. Please discuss your specific tax issues with a qualified tax professional.} 

Name the next three letters in this combination: OTTFFSS.

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Last Month's Riddle:What five-letter English word can be pronounced the same even with four of its letters removed?

Answer:Queue