Guide to the Markets

In February, international equities rose by 1.4%, compared to -1.3% in the U.S., while global bond yields fell by 12bps. Uncertainty surrounding tariffs and federal spending in the U.S. triggered growth fears, coinciding with softer readings in PMIs and consumer confidence.

Despite these concerns, U.S. economic indicators remain robust. In January, the U.S. added 143k jobs. Although this figure was below estimates, it still reflects healthy labor gains, and downward revisions to prior months likely indicate higher-than-expected productivity. Additionally, January's headline CPI was 3.0% y/y (0.5% m/m), while core CPI rose 3.3% y/y (0.4% m/m), both exceeding expectations. This was driven by persistently high costs in shelter, dining, and recreation services. Moreover, core goods and energy prices were not detractors compared to previous months.

Concerns about sticky inflation have intensified, yet growth fears have also escalated. This shift has led to an upward revision in Fed rate cut expectations compared to a few months ago, now projected at 60bps for the remainder of 2025.

Earnings seasons around the world are at different stages, with a strong focus on technology. In the U.S., the tech sector grew 20% y/y. The Magnificent 7 delivered another solid quarter with 31% y/y growth, while S&P 500 ex-Mag 7 earnings notably accelerated to 15%, led by Financials and Consumer Discretionary. Despite this solid performance, the U.S. tech sell-off deepened due to concerns about profitability and future guidance. Tech CEOs tried to alleviate fears about capex spending by emphasizing the need for greater investment in next-generation reasoning models.

In China, large tech companies also reported strong earnings, driven by robust demand for cloud computing services and enthusiasm for more cost-efficient data training. Year-to-date, large, HK-listed tech and consumer discretionary companies have been driving the rally, with the Hang Seng index up 13.7% compared to only 2.0% for China A-shares. In Europe, companies are exceeding low expectations, with net earnings revision ratios turning positive for the first time in several quarters. European equities rose a robust 3.7% this month.

In the U.S., policy uncertainty has heightened growth fears. President Trump implemented an additional 10% tariff on China and outlined plans for 25% tariffs on specific products, along with reciprocal tariffs to address tariff and non-tariff barriers. The administration aims to target practices it deems unfair, such as value-added taxes in the EU, which average 20%. Additionally, government spending cuts continue to make headlines, with the Department of Government Efficiency (DOGE) announcing savings of $55bn so far, despite other reports suggesting the total is closer to $9bn.

Global bonds performed better in February, rising by 1.4%, compared to 0.6% last month, due to increased growth fears and some central banks cutting rates. While rates remain elevated, investors should focus on the bond market for income and diversification rather than capital appreciation. Alternative investments also offer strong diversification benefits amid tariff uncertainties and volatility in public markets.

Despite these uncertainties, investors should explore opportunities in international equities, particularly in Japan and Europe ex-UK, short to medium duration fixed income, and alternatives like infrastructure and private equity. Adhering to an investment plan, including regular rebalancing and goal-based adjustments, remains the most effective long-term strategy.