Views at a glance – February 2026
Global markets were steady in the first month of 2026, but political and geopolitical shifts could lead to higher volatility.
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A slight pickup in volatility
Global stock markets remain close to recent highs, but volatility has been increasing in recent weeks. While US economic growth and corporate profits remain robust, several developments are clouding the outlook. First is geopolitics, with the US taking – or threatening - action in Venezuela, Greenland and Iran. Although these situations have de-escalated for now, they point to a world characterised by more conflict - and higher risk of economic disruption. Technology is another area of focus. Strong results from Microsoft were overshadowed by higher-than-expected spending on AI infrastructure, as well as indications that AI-related revenue may not be growing quite as quickly as hoped. Lastly, monetary policy. At its latest meeting, the Federal Reserve (Fed) suggested that US interest rates will remain on hold for now. Trump’s proposed new Chair of the Fed also raises questions about the Fed’s future direction.
Not the Kevin the markets were expecting
After months of speculation, President Trump nominated Kevin Warsh to replace current Fed Chair Jerome Powell later this year. Warsh is regarded as a credible economist and previously served on the Fed’s policy-setting committee. This is reassuring for investors, who had been concerned about a more overtly political appointment. However, the nomination could still contribute to market volatility. Warsh has spoken extensively about his belief that the Fed should not be a significant owner of US government debt, arguing that it blurs the distinction between fiscal and monetary policy. Any move to reduce bond holdings could push yields higher. His views on interest rates are less clear: while he has often argued for higher interest rates, he has recently struck a more “dovish” tone.
Will other bond markets follow Japan’s?
For many years, betting against Japanese government bonds was known as a "widow-maker" trade, given the heavy losses it inflicted. More recently, however, the trade has been very profitable. Bond prices have been rapidly falling as yields on Japan’s 10-year bond have risen above 2% for the first time in some 20 years. Yields on 40-year bonds surged to a record 4.2% in late January. Ahead of a snap election on 8 February, Japan’s new Prime Minister Sanae Takaichi is calling for higher government spending. This has increased pressure on yields due to concerns about debt sustainability. Meanwhile, the yen surged to a two-month high against the dollar, on speculation that Japanese authorities were intervening directly to support the currency. For now, long-term bond yields in other major markets remain relatively stable.
Portfolio positioning
We remain slightly overweight in equities, supported by the still favourable economic backdrop. However, we recognise that valuations are stretched in some areas and are broadening our market exposure beyond the US. We also remain focused on the defensive and diversifying assets within our portfolios. We have reduced our underweight allocation to alternatives by adding to our absolute return allocation. These strategies have a strong track record of generating returns with low correlation to equity and bond markets and can benefit from higher volatility. Given robust economic growth and above-target inflation, we have become more cautious on bond markets. We maintain our overweight allocation to gold despite recent volatility.
Key
🟢 Positive
🔵 Positive/Neutral
⚪ Neutral
🟠 Negative/Neutral
🔴 Negative
Outlook
Economics |
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Valuations |
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Sentiment |
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Risks |
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Asset Classes
Asset classes | Current positioning | Current views |
Equities | 🔵 | Equities are supported by resilient growth and ongoing tech investment Despite elevated valuations and high market concentration, fundamentals remain strong. The current earnings season has been robust, with attractive opportunities emerging in areas such as Asia and emerging markets as market leadership broadens. |
Bonds | 🟠 | Government bond yields are attractive versus the past decade. However, market expectations for US and UK rate cuts look too optimistic. We prefer a defensive stance, favouring asset-backed securities, and shorter duration. |
Alternatives | ⚪ | We prefer assets with limited correlation to traditional markets given geopolitical uncertainty. This includes gold, commodities, and selective absolute-return strategies despite the higher hurdle from cash and bond yields. These provide diversification given risks around government debt and longer-dated bonds. |
Cash | ⚪ | Cash yields remain attractive with central banks at or near the end of their easing cycles. Cash provides us with the flexibility to allocate into tactical opportunities that arise during market volatility. |
Equities
Asset | Current positioning | Current views |
Equities | 🔵 | Equities are supported by resilient growth and ongoing tech investment Despite elevated valuations and high market concentration, fundamentals remain strong. The current earnings season has been robust, with attractive opportunities emerging in areas such as Asia and emerging markets as market leadership broadens. |
US | 🟠 | Tariff uncertainty has eased, but inflation pressures, political risks and high earnings expectations remain headwinds, supporting an underweight position. We continue to like selective exposure to smaller companies, which should benefit from the OBBB, resilient growth and a rate cutting cycle. |
Europe | 🟠 | Europe faces structural challenges from China’s excess supply and elevated political risk. Valuations are slightly expensive versus its own history and earnings expectations remain weak, so we prefer selective exposure. However, fiscal stimulus is supporting early signs of a domestic recovery. |
Japan | 🔵 | Earnings have been muted but revisions are positive, despite slightly elevated valuations. Strong demand, foreign inflows, governance reforms and Japan’s new Prime Minister support a more durable cycle and add potential policy momentum. Monetary policy is normalising but remains at accommodative levels. |
Asia/ Emerging markets | 🟢 | Cheaper relative valuations versus global counterparts, solid growth and easier financial conditions have brightened EM Asia’s outlook, though tariff risks persist. Chinese exports are recovering and India remains resilient, supported by strong long-term drivers. |
UK | ⚪ | UK equity valuations remain attractive versus other developed markets. Growth is modest but resilient, though sticky services inflation limits BoE further rate-cut potential. |
Bonds
Asset | Current positioning | Current views |
Bonds | 🟠 | Government bond yields are attractive versus the past decade However, market expectations for US rate cuts look optimistic. We prefer a defensive stance, favouring asset-backed securities, and shorter duration. |
Government bonds | 🔵 | Yields are attractive, but higher US borrowing needs and central bank uncertainty cloud the outlook. With markets pricing in too many rate cuts in the US and UK, we’ve trimmed long-duration exposure and see selective opportunities in the UK, particularly in shorter duration. |
Credit | ⚪ | Credit spreads remain expensive versus history, but fundamentals are still reasonable, so we prefer shorter-duration credit, including high yield. We also stay positive on high-quality asset-backed securities where valuations look attractive. |
Inflation-linked | 🟠 | Real yields across many developed markets remain positive, and near-term inflation-linked bonds appear expensive, so we prefer nominal bonds. |
Emerging markets | ⚪ | Emerging market growth prospects remain relatively robust, albeit fundamentals are mixed and tariffs pose a headwind. With rate cuts already priced in and valuations elevated after a strong run, we remain selective. |
Alternatives and cash
Asset | Current views | |
Alternatives | ⚪ | We prefer assets with limited correlation to traditional markets given geopolitical uncertainty This includes gold, commodities, and selective absolute-return strategies despite the higher hurdle from cash and bond yields. These provide diversification given risks around government debt and longer-dated bonds. |
Key holdings | ||
Absolute Return | Focus on trend-following, equity market neutral and global macro to maintain diversification during macro uncertainty. | |
Liquid private real assets | Attractive revenue streams, especially in renewables, infrastructure and specialist property. | |
Commodities | Useful diversification, supported by energy exposure and industrial metals driven by transition demand. | |
Gold | Hedge against growth/inflation shocks. Despite recent volatility, geopolitical tensions, central bank buying, retail buying, and rising debt levels remain supportive | |
Terms
Spread: the difference in yield between a non-government and government fixed income security.
Duration: approximate percentage change in the price of a bond for a 1% change in yield.
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This article is issued by Schroder Wealth Management (US) Limited, a firm authorised and regulated by the Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission. Registered office at 1 London Wall Place, London EC2Y 5AU. Registered number 10761882 England. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Schroder Wealth Management (US) Limited unless otherwise stated. For your security, communications may be recorded and monitored.
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