Market Commentary

February 2026

Global Equities –

The trend of non-US equity markets outperforming the US con­tinued in February, as investors questioned the business models of software-as-a-service (SaaS) companies in the face of continued AI disruption.

However, by the end of the month, a US- and Israeli-led strike on Iran, and its retaliation, took centre stage, with the wider region affected by this conflict. These strikes across the Gulf have forced airport closures, closed the Strait of Hormuz and driven gyrations through financial markets in the first days of March. The market’s immediate, knee-jerk reaction was a flight to safe-haven and en­ergy assets. Looking ahead, market sentiment will depend on whether this is a contained disruption or the start of a more pro­longed conflict.

However, markets were mostly closed on 28 February when ten­sions flared, so the market reaction will be mostly felt in March. Nevertheless, speculation about action in Iran was mounting throughout the month, and despite this heightened risk, Europe­an and Japanese equities posted strong gains in February – the STOXX 600 rose 3.9% and Japan’s Topix gained 10.5%.

🟢 Investor note:

Despite rising geopolitical tensions, global markets remained resilient through February. The outperformance of European and Japanese equities suggests investors are increasingly diversifying away from US concentration risk. However, the escalation in the Middle East could drive near-term volatility in energy prices and global markets, making diversification and risk management increasingly important.

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Europe –

US equity returns were mixed last month. The market capital­isation S&P 500 Index – where larger companies have a bigger influence on returns– fell 0.8%. The Equal Weighted S&P 500 Index – where each company counts the same regardless of size – rose 3.5% in February. The Magnificent Seven dragged the index down, as these behemoths fell 7.3% in February. The Nasdaq dropped 3.3% in February amid ongoing volatility due to concerns about the impact of AI on specific industries.

By contrast, performance outside the US was notably stronger. Europe’s STOXX 600 posted its eighth consecutive monthly gain for the first time since 2013, rising nearly 4% to bring its year-to-date returns to 7.3%. Japan’s Topix meanwhile surged over 10% after Prime Minister Sanae Takaichi secured a landslide victory in her snap election in early February. In the UK, the MSCI UK rose 7.3% in February, buoyed by its international exposure.

Earnings season was broadly strong, though software compa­nies saw renewed volatility after investors questioned whether AI could disrupt traditional SaaS models. The S&P 500 Software In­dustry Index fell a further 9% in February after dropping 13% in January.

The market environment has now shifted from favouring AI lead­ers towards identifying companies whose business models are most likely to be threatened by the fast-developing technology. While underlying earnings for these businesses continue to be solid, investors are less confident about these companies’ future prospects.

🔴 Investor note:

Market leadership is broadening beyond large US technology companies. Investors are reassessing which sectors benefit from AI and which may face disruption, leading to increased volatility in software and growth sectors. This environment may favour more diversified portfolios and opportunities in regions and sectors that have been underrepresented in recent years.

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United States –

 On 20 February, the Supreme Court of the United States ruled that sweeping tariffs imposed by President Donald Trump on key trading partners did not comply with federal law. The 6–3 decision dealt a significant setback to the administration’s economic strat­egy and introduced new uncertainty around existing trade ar­rangements. It also raised the possibility that the United States government could ultimately be required to reimburse businesses for billions of dollars in tariff payments, despite many firms having already passed those costs on to consumers.

Markets have welcomed the ruling so far, viewing it as a constraint on the administration’s ability to use tariffs as a negotiating lever. While a replacement tariff framework, beginning at 10% and po­tentially rising to 15%, was enacted under a little-tested provision allowing the president to impose broad tariffs for up to 150 days without congressional approval, the days of ratcheting tariffs ap­pear to be over.

🟢Investor note:

The ruling reduces the likelihood of an aggressive escalation in US trade tariffs, which markets generally view as positive for global trade and corporate earnings. However, policy uncertainty remains, and investors should expect continued political influence on markets as the administration explores alternative trade measures.

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United Kingdom –

The Bank of England (BoE) voted to keep rates steady at its 4 February meeting in a close 5–4 vote, with the four dissenting Monetary Policy Committee members voting to reduce rates by 0.25%. The central bank forecasts CPI inflation will fall to 2% later this spring, while lowering its economic growth forecasts and increasing its unemployment predictions. This will likely lead to the central bank lowering interest rates further later this spring.4

The European Central Bank (ECB) kept interest rates unchanged and maintained its assessment that inflation should hover around 2%. The bloc’s economy remains resilient, as low unemployment, solid private sector balance sheets, and the gradual rollout of pub­lic spending on defence and infrastructure are supporting growth. However, the bank warned that the outlook remains uncertain, owing to ongoing global trade policy uncertainty and geopolitical tensions.

February underscored a market environment of positive re­turns, amid a rotation and repricing. Leadership continued to shift away from US technology companies towards non-US markets, as AI disruption and policy uncertainty created volatility beneath the surface. At the same time, political developments – from US trade rulings to Japan’s electoral outcome – reinforced that domestic policy dynamics remain an important driver of regional perfor­mance differentials.

While geopolitical tensions in the Middle East have introduced a new layer of uncertainty heading into March, markets enter this period from a position of relative strength. Corporate earnings have been solid, and central banks are eyeing modest policy eas­ing, with growth and inflation dynamics warranting close atten­tion.

Looking ahead, volatility may remain elevated as investors assess the durability of the Iran conflict and the evolving political land­scape. Market leadership is broadening, and policy risks are being recalibrated rather than escalating. While geopolitical events can be unsettling, periods of uncertainty are likely to generate selective opportunities.

🟠 Investor note:

With inflation expected to fall and central banks potentially beginning rate cuts later this year, the macroeconomic backdrop could become more supportive for risk assets. However, slowing growth forecasts and geopolitical risks suggest investors should remain selective and focused on quality companies with resilient earnings.

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Asia –

On 8 February, Japanese voters handed Prime Minister Takaichi and the long-ruling Liberal Democratic Party a supermajority of two-thirds of the seats in the 465-member lower house of Parlia­ment – the first political party to achieve this in a post-war era. It was a historic moment in a country where prime ministers typical­ly govern with narrow margins and make compromises to their agenda to appease coalition factions.

The victory will give Takaichi room to push forward with her agen­da, which includes a tougher stance on immigration, a review of rules around foreign ownership of Japanese land, and spending more while cutting taxes to revive the economy. She may also now have the political leverage to revise Japan’s Constitution to loosen constraints on its military, clearing the way for higher spending and expanded operations beyond Japan’s shores. She will have to tread carefully, in case her expansionist policies prove inflationary. Equities soared on the news, with Japan’s Topix rising 10.5% in February, bringing its returns to 14.4% so far this year. The yen rallied on the back of her victory before ending the month at close to unchanged levels. Japanese government bonds rallied sharply, with 30-year yields declining to 3.3%, the lowest for the year.

🟢Investor note:

Japan’s strong equity performance reflects renewed investor confidence in political stability and potential pro-growth reforms. Structural changes, fiscal stimulus and improved corporate governance continue to support the long-term investment case for Japanese equities.

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Summary for Investors –

February highlighted a shifting market landscape. Leadership is broadening beyond US mega-cap technology companies, with European and Japanese equities delivering strong returns. At the same time, investors are reassessing which industries are most likely to benefit from – or be disrupted by – rapid advances in artificial intelligence.

Geopolitical tensions in the Middle East have introduced new uncertainty heading into March, particularly given the potential impact on energy markets and global trade routes. However, markets entered this period from a position of relative strength, supported by resilient corporate earnings and the prospect of gradual monetary easing from major central banks later in the year.

For investors, the environment reinforces the importance of diversification across regions, sectors and asset classes. While volatility may remain elevated in the near term, shifting market leadership and evolving policy dynamics could create selective opportunities for long-term investors who remain disciplined and globally diversified.