Investment Viewpoint: Global equities extend February gains

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What do developments over the weekend mean for markets?

• Over the weekend, military conflict escalated between the United States, Israel, and Iran. Although markets had anticipated the possibility of US strikes, the scale of the action appears to be at the upper end of expectations. It is still too early to know how the situation will develop or how long it may last, although current market expectations lean toward a relatively short-lived confrontation. Financial markets responded immediately, with global equities falling by around 2% this morning and oil prices rising by 8–10%. The key issue for the global economy and investment markets is how far oil prices rise and how long they remain elevated, as this will determine the impact on both growth and inflation.
• Historically, similar geopolitical events and short-term spikes in oil prices have not caused lasting damage to global growth or inflation, and market pullbacks during such periods have often presented buying opportunities. So far, equity markets have mainly surrendered gains made in February and have not declined to levels that would warrant changes to strategic asset allocation. More importantly, underlying trends in global growth and inflation remain relatively benign, and as long as those fundamentals remain intact, markets are likely to view the current volatility as temporary and driven predominantly by geopolitical uncertainty rather than economic deterioration.

What happened in markets last week?

• Global equity markets continued to advance last week, with the World Index rising by 0.2%, rounding off a strong February in which markets gained roughly 2.1% in euro terms. Sector performance during the month was shaped in part by concerns around AI driven disruption.
• Overall, there was a cyclical bias to sector returns, with energy, materials and industrials among the leading contributors. However, some traditionally defensive sectors, particularly utilities and consumer staples, also outperformed. The main laggards were financials and segments of the “new economy” space, where AI related uncertainty acted as a headwind for communication services and technology names.

What factors helped markets?

• Sentiment was helped by broadly benign economic data. In the US, better than expected employment figures eased concerns of an abrupt slowdown. In Europe, early signs of Germany’s fiscal stimulus, especially increased defence spending, appear to be filtering through. Notably, the euro area manufacturing PMI moved back into expansion territory during the month, marking a positive shift.
• Inflation data was also relatively contained. In the US, core CPI remained steady at 2.5% year on year despite recently implemented tariffs, though the core PPI measure did pick up. In the euro area, core inflation edged lower by a further 10 basis points.

What effect did the US Supreme Court decision on Trump’s tariffs have on markets?

• Trade policy re emerged as a theme when the US Supreme Court struck down certain tariffs; however, the administration quickly reinstated equivalent measures under different legal powers. Markets largely shrugged off the news, expecting overall tariff levels to remain broadly unchanged.

What role did earnings season play in supporting equites?

• Corporate earnings provided another tailwind. The reporting season continued to surprise positively, particularly in the US, where profits are growing at 14% year on year, which is around seven percentage points above expectations. In the euro area, earnings growth of 4% also exceeded forecasts. Cyclical sectors led the way, with industrials and materials strongest in the US, and financials and materials outperforming in Europe.
• Defensive areas saw more subdued earnings trends. Among the large US technology leaders, the “Magnificent Six” delivered another robust quarter. Their earnings growth in Q3 exceeded the broader market by four percentage points, and this gap widened sharply to 18 percentage points in Q4. Despite this strong momentum, share prices have not fully reflected the improvement, creating a disconnect between fundamentals and market performance.

What strategic changes did we make during February? 

• Against this backdrop, we adjusted our strategic portfolios during February. With data showing that the global economy is expanding at least at trend, and with fiscal policy support set to strengthen further in the euro area, the US, and potentially Japan, we have increased the cyclical exposure in our portfolios. This involved raising our allocation to industrials while reducing defensive positioning through a lower weighting in utilities.
• We continue to expect global economic momentum to be maintained, though it remains relatively narrow. Much of the current extra strength is linked to capital investment, particularly in the US, but we anticipate additional support from consumption and investment in Germany in the months ahead.
• Overall, the outlook for equities remains broadly constructive: monetary policy across major developed markets is either on hold or moving gradually toward easing, while growth remains at trend levels and may even rise modestly above trend in the near term.

The week ahead: what to watch out for

It is a busy week for data. From the euro area, we will get the main business surveys (the PMI’s), the CPI report and Retail Sales. From the US the main news will be the jobs report (nonfarm Payrolls), we will also get the main business surveys (the ISM’s). From China we will get the PMI surveys.