Barometer: Stock market rotation won’t derail rally

Asset allocation: Churning equities to head higher

From the US and Europe to Japan and emerging markets, the economy remains on a solid footing, supported by falling interest rates and generous public spending.

At the same time, AI-related investment shows no signs of slowing: large tech firms have announced plans to spend more than USD600 billion this year alone to build out data centres and digital infrastructure.

The combination of easy money, fiscal stimulus and the AI capital
expenditure boom is positive for equity markets. Add strong corporate earnings to this mix, and we see a sufficiently strong case to retain an overweight in equities and a corresponding underweight in bonds. 

That's not to say we can disregard developments in the Middle East. The US-Israeli military assault on Iran that began on Feb 28 could have wide-ranging consequences for the economy and financial markets over the long run. In the short term, any conflict involving a country that has a major influence on the supply of oil is bound to affect the price of crude. Yet even if we envisage some turbulence in oil markets, we don't expect the kind of spike that would feed through into financial markets more broadly. For all this, though, the US strike is another reason why we remain overweight gold and safe harbour currencies such as the Swiss franc. 

Fig. 1 - Monthly asset allocation grid
March 2026

Supporting our overweight stance on equities and our underweight on bonds are positive readings from our business cycle indicators.

Almost all major countries and regions we monitor are registering
positive growth dynamics.

In the US, AI spending by leading tech firms is likely to contribute around 0.7% to GDP growth this year; domestic tech investment is running at least 20% above the pre-Covid six-year average.

A potential risk worth monitoring, however, is that US households appear to be tightening their belts at a time when their savings rate has fallen to 3.6%, roughly half its normal level. US real personal consumption – which makes up around 70% per cent of the country’s GDP – has declined to 1.7%, below the six-year average, from 2.6% at end-2024 as the impact of tariffs and higher energy prices starts to weigh.

We expect no further monetary policy easing from the US Federal Reserve in the near term, after cumulative cuts of 175 basis points so far in this cycle.

Fig. 2 - Growth and inflation: a risk-on mix
Average growth and CPI, actual and 2026 forecast for G4 countries (the US, Japan, euro zone and China), % 

Elsewhere, the euro zone economy is benefiting from renewed growth in services-oriented southern economies and the potential for a manufacturing revival in Germany and Italy, supported by the lagged effects of monetary policy easing and fiscal stimulus. Services and manufacturing activity, as well as higher domestic consumption, are also supporting growth in the UK.

Separately, Japan’s transition away from a stagflationary environment continues at pace. Industrial production, positive business sentiment and public spending running at 4% of GDP are improving growth prospects in the world’s third largest economy.

Emerging economies are, meanwhile, expanding rapidly. We expect the GDP growth gap between emerging and developed economies to widen to 250 basis points this year from 230 basis points in 2025. Strong commodity prices, resilient intra-emerging market trade and higher real yields are among the factors that continue to draw investment into the developing world. 

Asia ex-Japan leads the pack, thanks to the region’s competitive edge in AI hardware and semiconductors. For all this, prospects look less positive for China, where consumption and the property sector remain weak and the savings rate remains structurally high at over 30%.

Our liquidity analysis shows over half of major central banks we monitor are easing monetary policy, with just over a third on hold, a positive signal for riskier asset classes. 

In the US, growth in bank lending and the Fed’s security buying programme are adding excess liquidity into an economy which already benefits from significant government stimulus and AI-related investment – the longer this goes on, the greater the risks of asset bubbles and renewed inflationary pressures.

This liquidity influx is lifting almost all boats. According to our valuation indicators, a record 95% of asset classes on our scorecards trade above their long-term trend. 

Japanese stocks have now become among the most expensive after key indices have rallied to an all-time high. As for corporate earnings, our models show they should grow 11% this year, lower than the consensus estimate of 16%. 

Technical indicators show global capital continues to chase equities, which saw inflows of over USD100 billion in the past four weeks. A notable regional divergence, however, is that the US's share of flows has fallen to the lowest level since 2020, while foreign buying of Japanese equities accelerated after the general election in February.

Equities regions and sectors: Rotation, rotation, rotation

Since last autumn, the rotation trade has been the prevailing trend in global equity markets.  Investors have been redirecting their capital from US tech stocks to regions and industry sectors that exhibit more attractive valuations and an improving growth outlook (see Fig. 3). The signs are that this shift will persist, albeit selectively.

Emerging markets stocks are among the asset classes that should continue to benefit. We expect emerging economies to grow by 4.1% this year, more than double the pace of their developed peers. Moreover, investors' renewed focus on real assets presents another catalyst that could boost cheaper stocks. A benign inflation outlook, supportive monetary policy and positive trend signals further support for our overweight stance on emerging market equities.

That said, rotations of this scale come with risks. An ongoing re-allocation away from US tech stocks could generate periods of stock market volatility. This is why we retain an overweight allocation to Swiss equities, which tend to hold up well when global markets struggle. We believe this market combines stable fundamentals with resilient performance even in periods of currency strength.

We are neutral on all other developed equity markets. In the euro zone, fiscal stimulus in Germany and elsewhere should boost future earnings prospects. But, so far, the extra public spending has not shown up in economic data. In the US, meanwhile, the economic backdrop is broadly positive, and equity valuations have turned neutral.

While the outlook for US stocks has been clouded by talk of a 'sell America' trade, we see a less aggressive scenario playing out. As the latest phase of the market rally has favoured other sectors over tech, US equities have seen a lowering of their premium versus peers. This is not just a function of the tech sector underperforming but is evident in valuation measures that adjust for the sectoral differences between regions. More than a third of the US equity exceptionalism premium has already been unwound.

Fig. 3 - Changing world order
Global equities performance since November 2025 by region, %

Among sectors, we remain overweight industrial stocks. These stocks benefit from improving manufacturing activity, renewed capital expenditure and the rollout of favourable policies in several regions (such as Europe’s infrastructure spending plans). We also like healthcare, a sector which we believe is in the the early phase of a new innovation cycle. Like industrials, healthcare offers protection from AI disruption fears as well as strong idiosyncratic fundamentals.

We are also overweight financials given a healthy outlook for profit margins and potential deregulation in the US. 

Despite recent volatility, tech remains a key structural growth theme – but one in which it pays to invest selectively. While we have reduced exposure to the overall AI ecosystem by cutting communication services to a neutral stance, we retain our overweight on IT. We believe growth prospects are better for hardware and semiconductors firms rather than those involved in software, a sector that is more vulnerable to advances in AI.

This shift to hardware feeds into our preference for emerging markets, where the tech industry is more exposed to semiconductors and less to software compared to the US.

Fixed income and currencies: Staying underweight Treasuries, overweight emerging markets

Even if US government bonds registered their strongest monthly return in more than a year in February, with 10-year yields moving closer to 4%, we are not convinced Treasuries will extend their gains over the coming months.

If anything, we see yields reversing course and heading higher once more. The reason is US growth or, more specifically, the possibility that the US economy expands at a faster rate than markets currently expect.

As Fig. 4 shows, real bond yields in the US – which are indicative of the fixed income market’s expectations for US economic growth – have fallen in recent months, bucking the global trend.

It’s a development that suggests markets anticipate some convergence between the performance of the US economy and that of its slow-growing peers in the developed world.

While that could indeed unfold, we believe the bond market is overly pessimistic on US economic prospects, perhaps neglecting the potential benefit the AI capital spending boom will deliver.

By the same token, the shift in real yields also points to an acceleration in growth in Europe and other developed economies, which to us looks equally implausible.

Taking this into account, we have retained our underweight stance on US government bonds.

Fig. 4 - US economy potentially stronger than real yields suggest
10-year inflation-linked government bond yields, %

Elsewhere, we remain convinced that the rally that has unfolded in emerging local currency bonds will continue for some months at least.

Key to our investment thesis is the expectation for a continued improvement in economic conditions across the emerging world.

Our economists expect GDP across emerging markets to grow by more than 4%, outpacing the 1.7% expansion we see in the developed world. A wider growth gap is, our models show, consistent with an appreciation of emerging currencies against the dollar – a major source of return in emerging market local currency bonds.

Also underpinning the asset class’s near term prospects is decline in inflationary pressures. The average CPI reading across developing markets has fallen to just 3.1%, which means that local currency bonds now offer unusually attractive real yields along with the potential for further currency appreciation.

In currencies, we expect the dollar to remain weak. That's not only against emerging market currencies – particularly in Latin America - but also against the euro and the Swiss franc.

Global markets overview: All hail Halo

AI-driven equity market churn continued apace during February. The US stock market lagged others, with European, Japanese and emerging market equities galloping ahead as investors tried to parse the impact of agentic AI on existing companies.

US stocks almost 1% on the month as investors fled companies that they see as vulnerable to AI-disintermediation – many of these same tech-heavy stocks had dominated the markets during recent years (see Fig. 5). Anything susceptible to disruption by AI – providers of bespoke software solutions, professional services, sales platforms – is suddenly suspect. Few forget what happened to Blockbuster as the age of streaming dawned.

Instead, investors have been seeking out companies that own hard-to-substitute physical assets or are in strongly regulated, difficult to disintermediate, sectors. These Halo stocks – heavy asset, low obsolescence – make up a bigger proportion of markets outside of the US while software, for example, has a heavier weighting in the US.

As a result euro zone equities gained more than 3% on the month in local currency terms, while the UK surged some 7% and Japan soared by almost 10%. Swiss and emerging market equities also gained more than 5%.

The split between positive and negative forces left the overall equity market up 1.5% on the month.

Fig. 5 - Hard landing for software
MSCI All Country World Index Software sector, rebased

This rift in the market is especially clear at a sectoral level. Materials stocks gained 10% on the month, utilities up 9%, industrials were up 7%, consumer staples up 8% and real estate – last year’s biggest laggard – gained 6.5%. By contrast, communications services were down more than 4%, IT down 1% and financials down by just over 0.5%. Worries about US economic prospects and the AI displacement of workers also weighed on consumer discretionary, down 3%.

That economic uncertainty lifted government bonds, with US Treasuries gaining some 3%, euro zone bonds up almost 2% and UK gilts up 2.5%.

Corporate bonds were subdued, edging higher on the month, with the US capturing the market’s extremes – high yield up just 0.1% while investment grade gained 1 %.

The dollar was mixed, up against developed market currencies but down against emerging markets. Sterling, for instance, lost 2%, while the Brazilian real was up 2.1%

Please note, the preceding commentary is based on prices as of Friday’s close and does not account for any market movements that occurred in response to the US-Israeli military raid on Iran.