On equity markets, investors continued to rotate away from mega-cap US technology names.
Markets were buffeted by multiple crosswinds in February. The US Supreme Court ruled against the use of the International Economic Emergency Powers Act to justify the April 2025 reciprocal tariffs, while tensions between the US and Iran escalated into armed conflict, though hostilities started after markets had closed for the month. Economic data was more positive. February business surveys pointed to continued broadening in global growth, while signs of cooling inflation pressures in the US, UK and Japan were well received by markets.
On equity markets, investors continued to rotate away from mega-cap US technology names. The US earnings season delivered another set of strong results, but concerns about the return on investment in artificial intelligence (AI) meant the market punished the hyperscalers for announcing yet more capex. The large size of these companies proved a headwind for global growth equities, which delivered negative total returns of -1.6%.
The rotation in equity markets boosted value sectors, and in particular those that stand to benefit from ongoing AI capex, such as manufacturers in Asia and raw material exporters in Latin America. Emerging markets outperformed developed markets to deliver total returns of 5.5% over the month.
While economic activity remained healthy, growing concern about risks of future AI driven unemployment, combined with growing geopolitical risks, put downward pressure on bond yields, and global fixed income delivered total returns of 1.1% over the month.
Broadening global growth, along with falling bond yields, supported small caps and real estate, both of which outperformed large-cap equities. Japanese small caps were the standout performer, while European real estate also outperformed its global peers.
Equities
Developed market equities delivered a 0.8% total return over February as performance continued to broaden beyond the US. Rising earnings expectations drove markets, with expectations for 2026 earnings growth rising by 60 basis points (bps) over the month.
AI continued to be the source of volatility in US equity markets and the S&P 500 was the worst performing major equity market over the month, with total returns of -0.8%. Investors are simultaneously concerned about the return on AI capex, and the potential for AI tools to significantly disrupt other sectors. The software sector was the most affected as investors worried about moats around the “software as a service” business model. Wealth management also came under pressure, and this, combined with concerns about the software exposure of publicly listed private credit managers, weighed on the broader financials sector. Investors rotated into asset heavy sectors, which are also expected to benefit from the ongoing AI infrastructure build out. As a result, materials, utilities and energy were the top performing sectors.
Markets reacted positively to the snap election victory of Japanese prime minister Sanae Takaichi, which delivered the first two-thirds supermajority since the Second World War. As investors factored in the increased likelihood of further fiscal stimulus, the Topix was the strongest performing regional market with total returns of 10.5% over the month.
UK equities delivered total returns of 6.5%, driven by large-cap UK stocks and their favourable sector mix that benefitted from both the AI rotation and concerns about rising oil prices. The more domestically focused FTSE 250 underperformed with returns of 2.3% over the month.
Fixed income
Global developed market government bonds returned 1.2% in February as investors looked to high quality assets amid growing AI and geopolitical concerns. Despite an increase in geopolitical risks, emerging market local currency debt continued its recent strong performance to end the month with returns of 1.4%.
Global investment grade fixed income returned 0.8% in February. Private credit continued to be in the spotlight as concerns about the sector’s software exposure grew, but the spillover into public markets remained limited. Global investment-grade spreads widened by 10 bps, while high-yield spreads widened by 21 bps.
UK Gilts were the top performing sovereign market in February as cooling inflation pressures increased the likelihood of near-term rate cuts. UK inflation decelerated to 3.0% in January with broad based declines seen across many sectors. Gilt yields fell by 25 bps over the month, and this fall combined with their high starting yield meant the UK was the top performing sovereign bond market in February, with returns of 2.5%.
Eurozone inflation in January came in below target at 1.7% year on year. The European Central Bank expects headline inflation to remain below target for 2026 and 2027, but kept interest rates on hold at its February meeting. However, investors are growing more concerned about weakening demand and long duration European bond yields fell over the month. European spreads remained stable, and the additional income meant Spanish and Italian sovereign bonds outperformed German Bunds.
Commodities
Commodities returned 1.1% over February. After a sharp correction at the end of January precious metals delivered a 12.4% return over the month. Rising US inventory levels weighed on energy commodities in February, although the subsequent escalation in Middle East tensions that occurred right at the end of the month caused oil prices to spike when markets re-opened at the start of March.
Conclusion
February was a good month for investors, with most asset classes delivering positive returns. Both economic and market data point to a continued broadening in growth and returns, and diversified investors will have reaped the benefits. However, under the surface there was significant volatility and return dispersion, a theme that is set to continue with geopolitics now triggering sharp moves in markets at the start of March.
As outlined in our 2026 Investment Outlook we expect this broadening to continue, while staying humble about our ability to predict the next evolution of the AI theme. Investors should remain broadly diversified to take advantage of the growing opportunity set, and also to manage concentration risk in the AI-dominated US market.