S&P 500’s February Warning: Momentum Stalls as Fed Hawk Looms and Small Caps Falter

The S&P 500 has been the only game in town for anyone who likes their equity exposure with a side of relentless outperformance. But as February 2026 begins, the warning lights are flashing. The index closed January up 1.4%, but the mood is shifting from FOMO to FOMC. The nomination of Kevin Warsh as the next Fed Chair is the sort of plot twist that makes traders reach for the antacids. Warsh isn’t just hawkish—he’s the guy who thinks Powell is a soft touch. If the market was pricing in a friendly Fed, it just got a reality check.

The facts: S&P 500 momentum is waning, with technicals showing negative divergence. According to Seeking Alpha, February is historically a minefield for the index, and this year is shaping up to be no different. Small caps remain dead money, underperforming large caps by a wide margin. The concentration risk is real—just a handful of megacaps are propping up the entire index. Meanwhile, warnings are multiplying about stretched valuations and the risk of a major crash if P/E multiples contract. The macro backdrop isn’t helping. Asian currencies are mixed as traders digest Warsh’s nomination, and the dollar is firming. Earnings growth is slowing, and the market is vulnerable to any negative surprise.

Let’s put this in context. The S&P 500 has defied gravity for years, but the cracks are starting to show. The index is expensive by any historical measure, and the bull case depends on a soft landing, resilient earnings, and a Fed that doesn’t spoil the party. But with Warsh at the helm, the odds of a hawkish pivot just went up. If the Fed signals higher for longer, the multiple expansion that fueled the rally could go into reverse. Small caps are getting left behind, and the breadth of the rally is narrowing. This is a market that’s skating on thin ice.

The setup is precarious. Technicals show the S&P 500 stalling near resistance, with momentum indicators rolling over. The index is vulnerable to a pullback, especially if earnings disappoint or the Fed surprises hawkish. The risk-reward is no longer skewed to the upside. Investors are starting to question whether bigger is still better, or if the whole house of cards is about to wobble.

Strykr Watch

Key levels matter now more than ever. The S&P 500 is testing resistance near its recent highs, with support at 4,800 and 4,700 below. A break below 4,700 opens the door to a deeper correction. The 50-day moving average is the first line of defense, but if that goes, the 200-day is the last hope for bulls. RSI is neutral, but the trend is flattening. Watch for any break of support as a trigger for increased volatility. Breadth indicators are weak, and leadership is narrowing. If megacaps falter, the index could unravel quickly.

The risks are obvious. A hawkish Fed could trigger a sharp selloff. If earnings growth stalls or guidance disappoints, the market could reprice lower. Concentration risk means that a stumble in a handful of names could drag the whole index down. Small caps offer no refuge, and defensive sectors are not providing much cover. The dollar is strengthening, which could pressure multinational earnings. Geopolitical shocks remain a wild card, with markets on edge after January’s volatility.

Opportunities exist, but they require discipline. Buying the dip near 4,700 with a tight stop could work if support holds. Alternatively, shorting rallies into resistance offers a way to play the downside. Hedging with volatility products or defensive sectors could provide protection. The key is to stay nimble and avoid complacency. The easy money has been made—now comes the hard part.

Strykr Take

The S&P 500 is at an inflection point. The risk-reward is no longer compelling, and the market is vulnerable to a correction. With Warsh looming at the Fed and earnings growth slowing, caution is warranted. This is a time to play defense, not chase new highs. Stay sharp, stay nimble, and don’t fall for the illusion of safety in size.