Global asset allocations have been undergoing notable shifts since the start of this year, driven by economic fragmentation, policy changes and evolving investor priorities. Geographical decoupling and nationalism are challenging traditional diversification, prompting more granular country-level assessments and reduced reliance on interconnected markets. A weaker US dollar, the Fed easing expectations and global growth acceleration all favour cyclical assets (such as non-US equities, commodities and emerging markets) over US-heavy portfolios. Home country bias is rising, with some investors cutting US exposure amid policy uncertainty, while alternatives like gold and precious metals are gaining traction.
Global equity markets have shown some mixed performances, with South Korea’s stock market leading the way, followed by Turkey and Brazil. One of the key trends has been the dominance of world's emerging markets: performances have been driven by the resurgence of commodities, policy support and value sectors (such as energy). Wall Street, in contrast, has disappointed: the S&P 500 Index is marginally down for the calendar year. But the Dow Jones Industrial Average Index has hit 50,000 for the first time in its history. Another major development on Wall Street this year has been the sell-off in some software names along with private credit, wealth managers, insurance brokerage, accounting services, real estate, trucking and logistic stocks.
After such a strong run on the US stock market, the technology sector (primarily the software names) finally corrected. It was always going to be a rollercoaster ride, but few expected the consequences to be so abrupt and so quick, with the software sector being the hardest-hit. Back in January 2025, Chinese upstart DeepSeek slashed nearly US$1 trillion off the US tech sector market capitalisations in a single day. But investors have now begun to ask whether these companies need to spend so much money on developing large language models, so February's crash was much more about the market pricing in the potential impact that agentic AI might have on existing software businesses. Everyone was hit, including a number of hyperscalers – enormous data centres that are spending the most on AI infrastructure.
In the last few weeks, leading US AI safety and research company Anthropic has released several new models and features that have once again shaken up the AI landscape. Global investors have taken this disruption seriously, which is why the S&P Software Index has fallen into bear market territory.
Surprisingly, the tech sector was sold down indiscriminately. Even those stocks that should benefit from the disruption – like the hyperscalers – were hit by the sell-off. This type of indiscriminate broad selling of high-quality technology names has in the past led to some excellent selective buying opportunities. The macro backdrop for AI remains solid – it will ultimately change the productivity landscape, and those companies that lean into it will be handsomely rewarded over the long term. However, further bouts of market volatility are likely as this advanced technology continues to render previous generations of tech know-how obsolete.
Investors would be well advised to keep a watchful eye on those large-cap tech names that are likely to see some very strong returns on their AI investments over time. And of course, a number of new players may enter the tech space as time wears on. This recent shakeout is evidently a big blow for the sector. But as Jensen Huang of Nvidia recently said, the US$660 billion capex investment is justified – OpenAI is making money. In his opinion, all of these companies' cash flows are going to start growing in due course. He went on to add that this represents a once-in-a-generation buying opportunity for investors.
After years, if not decades, of US technology-led dominance, we are now seeing some meaningful rotation towards traditional “old economy” stocks and sectors, as investors gravitate towards real-asset businesses and industries (ones that had previously fallen by the wayside). Sectors such as oil & gas, chemicals, transportation, consumer staples, healthcare, materials and selective regional banks have all been performing much better in recent months, and in some cases even outperforming high-flying tech stocks. Three important factors explain this shift in sentiment: attractive valuations, accelerating corporate earnings growth and a desire on the part of some investors to diversify away from crowded trades, such as mega-cap growth stories.
Furthermore, the economic environment (in the US in particular) is being buoyed by several tailwinds: consumer spending from higher-income households, fiscal support from last year’s tax bill (which led to large tax refunds), incentivised business investment and elevated AI-related capital spending.
All of this suggests that the US economy remains well supported, with the potential for above-trend growth that could lift revenues across a much broader set of sectors – hence the rotation across a wider set of US companies.
In the last few weeks, both the European Central Bank and the Bank of England have decided to leave their key deposit rates unchanged (2.0% and 3.75%, respectively). European policy makers have indicated that their economy remains resilient in a challenging global environment and that inflation should stabilise at its 2.0% target in the medium term. In the UK, meanwhile, four of the nine members of the Monetary Policy Committee unexpectedly voted to lower borrowing costs, prompting market watchers to expect an interest rate cut very soon.
On the political front, Sir Keir Starmer seems to have survived recent calls for his resignation over his ill-judged appointment of Peter Mandelson as ambassador to the US, despite Tory leader Kemi Badendoch’s claims that he had lost control of his party and the country.
But political uncertainty and recent sluggish growth data announced by the Office of National Statistics did not stop the FTSE 100 Index from rallying above the 10,000 points level for the first time in its history, aided by two merger announcements: NatWest’s acquisition of Evelyn Partners and US group Nuveen’s takeover of Schroders.
In Asia, the Japanese market rose sharply on the news that Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) had secured a supermajority in the recent election, winning more than two-thirds of seats. This landslide victory was testament to the public backing of Takaichi’s policy agenda, focused on aggressive fiscal spending, investment, and targeted tax cuts.
After the announcement of the LDP’s resounding victory, the yield on the Japanese benchmark 10-year government bond settled down following a period of relative volatility. The yen strengthened notably against the US dollar as Japan’s top currency diplomat Atsushi Mimura asserted that the government had not lowered its guard at all, and that its policy remained unchanged: to continue monitoring the markets closely and with a sense of urgency, and maintain close communication with markets.
Overall, the last month has been volatile. The US tech sector has suffered some vicious swings, and there has been some rotation into traditional old-economy stocks and sectors. However, we remain cautiously optimistic about the general backdrop for the markets: we are seeing a broadening out of US corporate earnings this year, alongside tax cuts, lower interest rates and solid growth. Indeed, the early part of 2026 has already delivered a solid set of corporate earnings reports.
Volatility is likely to continue over the short term. Nevertheless, the rotation already underway away from the US is likely to continue, and the beneficiaries will be the emerging markets, Japan, Europe and the UK. Elsewhere, gold and other precious metals will remain in the spotlight, as will other “safe haven” assets, such as short-duration bonds and defensive equity sectors. Despite market rotations and volatility, we remain optimistic regarding global equities – given the solid fundamental drivers of a growing economy and healthy corporate profits.
