Equity returns have continued to broaden outside the US technology sector, boding well for our recommendation to diversify across regions.
While January was volatile for financial markets, given heightened geopolitical tensions, investors’ appetite for risk increased. Global equities rose 3% on the month, while global bonds made limited progress.
Equities benefited from rising growth expectations, and a preserved Goldilocks environment. Indeed, activity data came in better than expected and inflation prints moderated, pointing towards real income gains for consumers.
Global bonds suffered from improved risk appetite, better activity data and some country-specific developments. US front-end rates sold off as expectations for the next Federal Reserve rate cut were pushed further out, while Japanese long-term bonds had their worst start to a year since 1994 due to rising fiscal concerns.
Geopolitical risks increased significantly following the US operation to remove Venezuelan President Maduro and President Trump’s threats to impose tariffs on several European countries that opposed his plans to take over Greenland. Although tensions have eased following the Davos gatherings, many assets sensitive to geopolitical risk reacted accordingly: gold rose 13% in January and European defence companies jumped 18%. However, the VIX and EUR/CHF moved more modestly.
Within equities, one word dominated markets in January: broadening. Diversification away from US large caps continued to play out. Within the US, small caps had a strong start to the year, up 5%, while the Magnificent Seven stocks rose only 1% on the month. In terms of regions, emerging markets were the best performing, up 9%, followed by Japan’s Topix, which rose 5%.
Commodities have had a strong start to the year, with the Bloomberg Commodity Index up 10%. Brent Crude oil prices rose 16%, while both European and US gas prices surged on colder-than-expected winter weather.
Equities
Global equities started the year on a strong footing, with the MSCI AC World Index up 3% in January on the back of better-than-expected activity data and moderate inflation prints. This repricing of growth was evidenced by the outperformance of cyclical stocks over defensives, especially in emerging markets and Japan.
Macroeconomic prints mostly surprised to the upside. While US non-farm payrolls came in somewhat below expectations, the US unemployment rate declined to 4.4%. Industrial production came in above consensus in Germany and in the US, and manufacturing orders picked-up pace. On the flash estimate, euro area real GDP increased by 0.3% in the fourth quarter, above expectations. In Germany, fiscal data for December showed a sharp acceleration in spending relative to November. Meanwhile, inflation data was broadly softer than consensus expectations in the euro area and in the US.
Equity returns have continued to broaden outside the US technology sector, boding well for our recommendation to diversify across regions (see 2026 Investment Outlook). Most markets outperformed the S&P 500 in January, and the Magnificent Seven stocks rose only 1%, in line with the S&P 500.
Emerging markets had a very strong month, up 9% in absolute terms. They have performed better in only one of the past 20 Januarys. Emerging markets also outperformed developed markets by 7%, a magnitude not seen since 2001. Within developed markets, Japan’s Topix was the best performing index in January, up 5%.
In terms of equity styles, small caps outperformed, both in Europe and particularly in the US, where the Russell 2000 rose 5%. Mid caps also did well, with the FTSE 250 and the MDAX ending the month among the best performing indices in Europe, up 3% and 2%, respectively.
Interestingly, growth outperformed value in Europe, contrasting with the secular trend of value outperformance that started early in 2022 with rising interest rates and commodity prices. By contrast, value outperformed growth in the US for the third consecutive month, further reversing a multi-year trend of growth outperformance in the US.
The equity rally has been mainly driven by earnings, rather than valuation expansion. Emerging markets, the Japanese Topix and materials stocks have seen large positive revisions to their 2026 earnings-per-share estimates. In the US, the fourth-quarter earnings season is now halfway through and positive surprises have been larger than in previous quarters. Reported earnings came in 9% above consensus expectations.
Fixed income
Bonds, as measured by the Global Aggregate index, did not add much to portfolio performance in January, as the index was up barely 1% on the month. Bonds struggled against a backdrop of broadly better-than-expected activity data, combined with investors’ concerns regarding public spending and US central bank independence. Inflation-linked bonds were an exception, up 1.6% on the month. While spot inflation has been benign in Europe and in the US, long-term inflation pricing picked up, especially in the US and Japan.
Japanese Government Bonds (JGBs) had their worst start to a year since 1994, down 1.3% for 10-year maturities. Following the announcement of snap elections by the prime minister, Sanae Takaichi, 30-year JGB yields rose as much as 23 basis points, leading to a sharp steepening along the Japanese curve. The 2s-10s spread widened 12 basis points. Connected to the JGB sell-off, the yen depreciated 1% against the US dollar.
US Treasuries also recorded negative performance, with most of the sell-off happening at the front-end of the curve. Better-than-expected economic data pushed expectations for the next Federal Reserve (Fed) rate cut further out, putting upward pressure on two-year yields, which rose 5 basis points. The back-end of the yield curve has not been spared either, due to concerns about the ability of the Fed to regulate inflation. In line with this concern, the US dollar depreciated 1% against the euro in January.
In the eurozone, French (OAT) and Italian (BTP) bonds outperformed most other markets, returning 1% and 0.7%, respectively. As broad risk appetite increased and country-specific risks reduced, investors were attracted by the carry offered by OATs and BTPs. In France, a budget aiming at reducing the deficit to 5% in 2026 (from 5.4%) will likely be voted on by mid-February. With the window for snap elections to be triggered coming to an end in April, one year ahead of the next presidential elections, policy risks should be reduced until the electoral campaign kicks off towards the end of 2026. The OAT-Bund spread fell to 62 basis points, the tightest level since President Macron triggered snap elections in June 2024.
Commodities
Commodities have had a very strong start to the year, with the Bloomberg Commodity Index up 10%. The price of gold rose by 13% in January, despite a sharp 10% drop on the last trading day of the month. In addition to support coming from central bank purchases, especially the People’s Bank of China, gold benefited from the sharp rise in geopolitical risks following the US operation to depose Venezuelan President Maduro and President Trump’s Greenland-related tariff threats.
Brent Crude oil prices rose 16%, and both Europe and US gas prices rose sharply on colder winter weather and an associated fall in storage levels.
Conclusion
The start of 2026 has been volatile but marked by increased investor risk appetite, which has driven global equities higher against a backdrop of strong economic data and broadly benign inflation. The rally has broadened beyond US large caps, with emerging markets, Japan and small/mid caps outperforming, highlighting the benefits of diversification.
In contrast, government bonds have struggled, with yields rising due to robust activity data and fiscal concerns, particularly in Japan and the US.
As we outlined in our 2026 Investment Outlook, we expect equity returns to broaden out in 2026, as earnings growth is more evenly balanced across regions, sectors and factors. Bonds deserve attention for their carry component, rather than for capital appreciation, and should help provide effective diversification for portfolios should recession fears return to the table.
To hedge geopolitical risks, investors may consider adding gold and European defence stocks to their portfolios, as well as more defensive and quality stocks, which tend to improve the resilience of portfolios at times of increased market volatility (see On the Minds of Investors – Investors seeking resilience should consider a quality bias).