What happened in
February
Donough Kilmurray
Chief Investment Officer
On the last day of the month, the United States and Israel launched air strikes on multiple targets across Iran, killing senior leaders of the regime, including Supreme Leader Ayatollah Ali Khamenei. Iran retaliated against shipping, military bases and US allies in the region, causing widespread disruption to transport and energy sectors. At the time of writing, it was too early to tell how much more bombing and retaliation was to come, or for how much longer energy supplies would be disrupted.
Only a week earlier, we had finally gotten the big decision on tariffs from the US Supreme Court, as they upheld the verdict of the Court of International Trade that President Trump did not have the authority to impose tariffs under IEEPA (the International Economic Emergency Powers Act). This invalidated all the so-called reciprocal tariffs from Liberation Day last April but awkwardly did not say what happens to the taxes that have already been paid. The furious President immediately struck back, using a different law (Section 122) that allows him to set up to 15% tariffs for up to 150 days. His administration is expected to re-impose most of the original tariffs using other sections of US trade law.
Aside from the military and trade chaos, the US economic outlook mostly improved in February, despite a disappointing Q4 GDP1 report. This showed that the economy only grew by 1.4% in the fourth quarter, well below expectations and the previous quarter. However, this period did include the longest US government shutdown on record, which is estimated to have taken at least 1% off growth, and the numbers did show that personal consumption grew by a solid 2.4%. More importantly, and more up to date, were the improved monthly inflation and jobs data. Consumer price inflation for January fell to 2.4%, and the unemployment rate dropped to 4.3%, with payrolls showing healthy growth of over 100k in the month. The only snag was that the Federal Reserve’s (the Fed) preferred measure of inflation2 went up to 3%, further from the 2% target, which may mean fewer and slower rate cuts this year.
Figure 1: Core inflation and job growth in the US
Source: Bloomberg, Bureau of Labor Statistics. Both inflation and job growth are 3- month rolling averages.
In the Eurozone, inflation stayed below the 2% target, business surveys improved a little more on the month before, and the European Central Bank was comfortable enough to leave the euro interest rate at 2%. Data was more mixed in the United Kingdom, with consumer inflation dropping to 3%, but unemployment rising to 5.2%. The UK GDP report for the fourth quarter of 2025 revealed an underwhelming 1% growth for 2025, and even though the Bank of England held pound rates at 3.75% in February, we do expect them to cut soon. There was more excitement in Japan where Prime Minister Takaichi won a landslide victory in the snap election she called, giving her a strong mandate for her proposed ‘proactive fiscal policy’, and leading to a bump in Japanese stocks and the yen.
Figure 2: Election impact on Japanese markets
Source: Bloomberg. Topix price return in Japanese yen rebased to 100 at start of 2026.
Moving to markets, lower inflation data helped bond yields come down during February, although much of the decline came towards the end of the month as the threat of military action against Iran ramped up. The lower yields meant positive returns for global bond investors. There was little action in currencies, with the US dollar holding firm after sliding a little in January. The real action was in commodities, where after a rapid rise and decline in January, they solidified their double-digit gains on the year (in US dollars). Precious metals bounced back from their January drop, with gold and silver up over 20% on the year, while oil prices rallied into the end of the month on fears of supply disruption from military action in the Persian Gulf. Lastly, February was another tough month for so-called ‘digital gold’, with bitcoin falling into the US$60-$70k range, down from US$125k in October.
Figure 3: Precious metal volatility in 2026
Source: Bloomberg. All metal prices are quoted in US dollars.
Moving to stock markets, there were strong crosswinds in February. By the end of the month, almost all companies had reported their final quarter and 2025 earnings, and the results were well ahead of expectations, in both the US (+14% year-on-year) and Europe (+4% year-on-year). The biggest contributors in the US were the technology and financial sectors, and financials were also the main driver of European earnings growth. Interestingly, the Magnificent 7 technology stocks3 generally posted impressive earnings, especially Nvidia, the superstar chipmaker, but the market did not reward their growth. As in January, the best returns came from the old economy cyclical sectors, including energy, materials and industrials, which helped the Eurozone, UK and Japan all beat the US again. Special mention must go to Korea, where the surge in semiconductor and memory chip makers has lifted the index up 50% on the year so far.
Figure 4: AI disruption across US industries
Source: Standard & Poors, Bloomberg. All price returns in US dollars, rebased to 100 at the start of 2026.
While 2025 was notable for huge rallies in stocks deemed to be AI (artificial intelligence) winners, February saw an intensification of the opposite trend, where markets went on the hunt for AI losers. During the month several different sub-sectors, from software to media to logistics and even wealth management, were hit with sudden selloffs when AI tools were announced that promised to render them obsolete. This also led to a new name for a different type of AI winner. Rather than cutting edge technology companies, "HALO" (Heavy Assets / Low Obsolescence) stocks have business models involving heavy physical content rather than information-based activity and therefore should be very difficult to displace with AI. While this may sound like another market fad, it does help to explain the out-performance of energy, materials and industrial sectors this year.
1 GDP is gross domestic product, the standard measure of economic activity.
2 The Federal Reserve targets core PCE, where PCE is personal consumption expenditure. PCE is usually close to the more commonly quoted consumer price index (CPI). Core means excluding food and energy.
3 The Magnificent 7 are Alphabet (aka Google), Amazon, Apple, Meta (aka Facebook), Microsoft, Nvidia and Tesla.
Warning: Forecasts are not a reliable indicator of future performance.
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