Having spent the past two years being excited about the disruptions that artificial intelligence (AI) would bring to the economy and financial markets, investors have been spending recent months worrying about the disruptions that AI would bring to the economy and financial markets. The focus has shifted from the opportunities for hyperscalers and potential beneficiaries to the challenges that some sectors or companies could face, with AI posing potential direct competition. Meanwhile, the U.S. Federal Reserve (Fed) is expected to appoint Kevin Warsh as its new chairman in May. The U.S. Supreme Court has ruled against U.S. President Trump’s tariffs based on the International Emergency Economic Powers Act (IEEPA), which triggered a fresh round of tariff announcements with the aim of replacing reciprocal tariffs.

Software to fall on hard times?

The NASDAQ index has ranged between 22,000 and 24,000 since 4Q 2025. Skeptics continue to question the sustainability of the AI hyperscalers’ capex boom, which has risen to USD 650billion for 2026, based on these developers’ revised forecasts. This increase largely reflects rising data center costs rather than greater compute power. Despite strong earnings performance for these hyperscalers, market reaction has focused on the gap between capex commitments and the ability to monetize such capex.

Meanwhile, several AI models released in February are seen as a threat to the Software as a Service (SaaS) business model, with software companies facing considerable valuation derating. Each category of services and companies needs to be assessed individually, requiring active management. It is important to understand whether these SaaS companies are looking to adopt AI to support and expand their operations or are running the risk of being overtaken by their competitors. Moreover, companies that possess data—such as customer information and spending habits—will still have a competitive edge, since data is valuable for training models and positioning them for future development.

The recent volatility reflects more of a two-way discussion on the future of AI. We see this as a multiyear development rather than something that delivers instant gratification to the economy and businesses. The questions over AI models’ future success—and the winners and losers that result—are important. That said, given the long-term projection of this technological advancement, the demand for data centers globally and the subsequent need for components, from semiconductors to memory chips, continue to support Northeast Asian markets, which remain global outperformers.

Goodbye IEEPA, Hello 122

On February 20, the U.S. Supreme Court ruled that U.S. President Trump exceeded his authority under IEEPA in imposing “reciprocal” global tariffs and targeted import levies linked to fentanyl trafficking. Existing tariffs under Section 232 and Section 301 are unaffected. In response, the administration imposed a 15% global tariff under Section 122, which can run for 150 days without a congressional extension. Exemptions include critical minerals, agricultural products, pharmaceuticals, certain electronics (including semiconductors), autos, and USMCA-compliant goods from Canada and Mexico.

The White House has also announced that it is launching new Section 301 investigations. These are expected to cover major partners and concerns such as industrial overcapacity, forced labor, pharmaceutical pricing, discrimination against U.S. technology and digital goods and services, and digital services taxes, with China and the EU being the most exposed.

While tariff risks remain, the court ruling likely narrows their scope going forward, even though trade partners may have to navigate a fresh round of tariff uncertainties. The administration will also need to be mindful of voters’ sensitivity to living costs ahead of the midterm elections.

Outstanding issues include potential importer refunds—possibly up to USD 170billion—that are likely contingent on litigation; smaller firms may be disadvantaged by legal costs. Some recent trade deals with U.S. partners could slow until there is clarity.

Fresh starts?

In late January, U.S. President Trump nominated Kevin Warsh for Fed Chair. He will assume the role in May after Senate confirmation. During his tenure as a Fed Governor, Warsh’s record skewed hawkish. He was critical of quantitative easing after the financial crisis. Yet he has recently argued for faster rate cuts, justified by AI-led productivity growth keeping inflation in check. With Warsh as the new Fed Chair, the Fed’s collegial structure means rapid easing would require him to build consensus. However, this looks unlikely in the near term given the expected acceleration in growth momentum boosted by fiscal stimulus.

In Japan, the Lower House election held on February 8 delivered a historic landslide for the Liberal Democratic Party (LDP), winning a supermajority of 316 seats out of a possible 465. This strong mandate allows Prime Minister Sanaa Takaichi considerable flexibility in policies, from defense to structural reforms of the Japanese economy. However, the new government will need to tread carefully to balance fulfilling its pledge to voters to suspend the sales tax on food to address affordability issues with maintaining fiscal responsibility. The perception that fiscal stimulus is funded by borrowing could provoke bond vigilantes and lead to higher government bond yields, especially at the longer end of the curve.

What does all this mean for investors?

The events in February do not change our overall portfolio construction recommendations. On equities, global diversification has worked well considering the strong performance in Northeast Asia as well as Europe. The options strategy overlay for U.S. equities has delivered as stock indices consolidate. Some investors may want to start exploring value strategies in APAC and global equities. Steady economic growth continues to support earnings growth across the board. Yet non-tech companies are likely to face less scrutiny of their capex plans. We believe tech and AI continue to be cornerstones of portfolio construction in the medium term. We just need to look for ways to find diversified opportunities—from developers to hardware to adopters.

On fixed income, the overall U.S. economic growth path and prospects for more fiscal stimulus should keep rates steady by the Fed through 1H 2026, even with a new Fed Chair leading the FOMC. Meanwhile, both inflation and the job market will need to deteriorate meaningfully for the Fed to justify lower policy rates, and this may delay the timing of the next cut deep into 2H 2026. Differentiation among developed-economy government bonds remains key. From the risk of rate increases in Australia to fiscal discipline under the spotlight in Japan and some European economies, the need for active management continues to be high.

Global economy

• The February Federal Open Market Committee (FOMC) minutes revealed a notable hawkish shift in Committee sentiment, with some members now favoring language that acknowledges that rate hikes could be appropriate if inflation remains elevated. This evolving stance reflects staff forecasts showing the unemployment rate falling below its natural rate by year-end and inflation persisting above the 2% target. Upside inflation risks persist from potential trade policy changes, immigration policy shifts, geopolitical disruptions, and robust consumer spending. Further rate cuts depend on sustained inflation progress as well as unemployment statistics, which could be influenced by AI disruption.
  (GTMA P. 25, 27, 28)
• Due to the Spring Festival period, most of China’s January economic activity data will be released in March, though the official Purchasing Managers’ Index (PMIs) pointed to softer activity, while high-tech manufacturing remained strong. Inflation slowed to 0.2% year-over-year (y/y) though partly due to the delayed holiday this year. On the external front, the latest changes to U.S. tariffs also helped China, which has a higher initial tariff rate relative to other economies, while domestically, the National People’s Congress is expected to convene and reveal upcoming policy direction by early March.
  (GTMA P. 4, 5, 6, 7)
• In Japan, the Takaichi-led LDP secured an over two-thirds majority in the Lower House election. The victory implies the LDP party can now pass legislation independently without coalition support, streamlining legislative control, gain the power to override bills rejected by the Upper House, and initiate national referendums on constitutional amendments.
  (GTMA P. 16, 17)

Equities

• Global equity markets diverged sharply in February, with international markets significantly outperforming U.S. equities as investors rotated away from concentrated mega-cap technology positions. The MSCI AC World Index rose 1.2% over the month, while U.S. markets declined 1.0%, weighed down by AI-related concerns and geopolitical tensions in the Middle East. Asia emerged as the clear standout, with the MSCI Asia Pacific ex-Japan Index surging 6.0%. South Korea and Taiwan led the regional rally, with the Korea SE Composite soaring 19.5% and the Taiwan SE Weighted Index climbing 10.5%, driven by robust semiconductor demand and technology sector strength. Japan also posted impressive gains, with the TOPIX rising 10.4% as the Japanese yen (JPY) weakened and corporate governance reforms continued to attract foreign capital. China remained a notable laggard, with the Hang Seng Index declining 2.8% due to concerns over potential value-added taxes on internet and gaming services, while continued distress in China's property market and rising oil prices further dampened investor sentiment ahead of March's policy meetings.
  (GTMA P. 30, 31)
• Equity valuations remain above long-run averages. The forward price‑to‑earnings (P/E) ratios were 21.7x for the S&P 500, 15.8x for MSCI Europe, and 17.4x for MSCI Japan.
  (GTMA P. 33)

Fixed income

• U.S. Treasury yields fell across the curve over the month, with the 10-year down 30 basis points (bps) to 3.96%, as concerns over widespread AI-led job losses, expectations of dovish actions by Warsh, and increased geopolitical concerns all added downward pressure. Yields on Japanese government bonds also fell, with the 10-year down 12 bps to 2.12%, as Takaichi’s election win signaled policy stability and her expressing reservations about further rate hikes in her meeting with Governor Ueda.
  (GTMA P. 56, 57, 61)
• Spreads on both investment-grade and high-yield bonds widened modestly by 10 bps and 25 bps, respectively, as AI disruption fears were offset by constructive earnings and resilient growth data, with global investment-grade and high-yield bonds returning 0.8% and 0.2%, respectively.
  (GTMA P. 63, 64, 65)

Other financial assets

• Geopolitical tensions surged after the U.S. and Israeli strikes on Iran, causing WTI crude oil to rise 4.0% per barrel as markets worried about potential supply chain disruptions. Copper was flat at 0.5%, reflecting mixed global growth signals. Silver, however, saw a decline of 12.8% in February, pressured by hawkish Fed news. In contrast, gold prices rose 4.8% on safe-haven demand. (GTMA P. 74, 75, 76)
• The U.S. Dollar Index (DXY) gained 0.6% in February on a combination of market risk-off sentiment and geopolitical uncertainty. Asian currencies were mixed against the U.S. dollar, with the Australian dollar the strongest pair, up 1.7% as inflation worries continued, and the JPY the weakest pair, down 1.2% amid renewed concern over delayed monetary policy normalization.
  (GTMA P. 71)

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