February 2026 market recap: Geopolitical tensions intensify and international equity outperformance continues

February picked up where January left off in markets with gold once again standing out as a top performer and international equities outperforming the U.S. However, under the surface, the events that led to these results differed from what investors saw play out in January.

Below, we recap how the conflict in the Middle East, artificial intelligence (AI) disruption and international equity flows moved markets in February and what these themes could mean for portfolios moving forward.

U.S. conducts military operations in Iran

Tensions between the U.S. and Iran escalated sharply throughout February. On the final day of the month, President Donald Trump announced that “the U.S. military began major combat operations in Iran” with an objective to eliminate “imminent threats from the Iranian regime.” Iran retaliated with its own wave of military strikes across the Middle East, targeting Israel and countries hosting U.S. military bases. The escalation has sent oil prices surging nearly 8% above $78 per barrel on concerns over supply disruptions particularly around the Strait of Hormuz, a major chokepoint in the global oil trade. The risk of further and continued conflict remains, and with it, real human consequences.

As investors, we can stay grounded by focusing on what we can control: Prudent spending, disciplined asset allocation and staying diversified during market volatility. While geopolitical shocks can spark short-term volatility, history shows that, barring major economic disruption, these events tend to fade from markets quickly. Gold remains our preferred potential diversifier against these kinds of events as the metal is not tied to any single country or government given it is less susceptible to individual actions or policy decisions. As geopolitical tensions rise, some investors turn to gold as a way to potentially increase diversification in their portfolios given its historical resilience during periods of global instability and conflict.

AI disruption creates winners and losers

Leading up to 2026, U.S. equity investors have largely benefited from the potential promise of artificial intelligence. In our 2026 Outlook: Promise and Pressure, we highlighted that investors should consider that we’re entering a phase where AI-induced disruption could bring consequences to markets. Investors saw this thesis start to take shape in February as new AI models demonstrated advanced capabilities in coding that enable users to interact with their computers in natural language to generate code and produce real outcomes. This shift helped trigger the S&P 500 Software Index to fall into a bear market as fears grew that these enhancements could render some software companies obsolete.

On the other hand, the AI disruption story is not all negative. AI could become a tailwind for certain parts of the market if these enhanced capabilities are able to deliver a boost to corporate earnings and create the kind of productivity gains investors are hoping to see. Over the last two years, S&P 500 companies using AI have increased their profit margin expectations in 2026, outpacing companies not using AI. As more companies integrate AI into their operations, productivity gains could become even more widespread, fueling further adoption and supporting a bullish outlook for U.S. equities.

Increased international equity flows help drive outperformance

While U.S. equities experienced pressure in February, the story was different overseas as international equities delivered another month of outperformance. February saw the biggest four-week inflow to international equity funds on record, a sign that investors could be seeking global diversification and looking beyond the U.S. to invest incremental dollars. These trends have been partially bolstered by the aforementioned dynamics of global conflict, international investment in AI and AI-driven software disruption, helping explain why international equities outperformed.

This non-U.S. outperformance isn’t just a flows story, however. Asian equities stood out among their global peers in February, with Japanese equities rallying +8.6% and Asia-ex Japan +5.9%. Japanese equities have been partially bolstered by the landslide victory of Prime Minister Sanae Takaichi, as she is expected to implement pro-growth policies including monetary easing and increased defense spending.

While non-U.S. equity momentum has continued into 2026 across the board, emerging markets (+5.5%) remain our top call outside of the U.S. moving forward, supported by strong demand for tech and AI-related exports that have caused a sharp upgrade in earnings expectations. Earnings in emerging markets are now anticipated to grow roughly 34%–35% year-over-year in 2026 (three to 3.5 times faster than developed markets).

Don’t let February’s events derail your plans

Looking ahead, our constructive outlook for U.S. equities in 2026 stands with our base case view calling for high-single digit returns of the S&P 500 from current levels. However, the interplay of global conflict, policy decisions and technological innovation is seemingly poised to continue shaping headlines in the near term, which could bring volatility to markets.

Staying focused on the long term and maintaining a diversified portfolio that incorporates different asset classes and geographies remains one of the best ways to potentially be better suited to weather whatever comes next.

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