February 2026 edition

 Three key takeaways

• We acted in late January as the evidence shifted, upgrading emerging markets to neutral
  and downgrading gold to neutral.
• Despite a steady stream of curveballs – common in midterm election years – markets remain resilient, staying anchored to earnings.
• Market leadership is broadening within the U.S. and abroad.

We just finished January, yet it already feels like we are much deeper into the year. The carousel of concerns continues to turn – Venezuela, a Federal Reserve (Fed) investigation, heightened Greenland rhetoric, and the nomination of a new Fed Chair.

In our recent outlook, we described this phase as The Seventh Inning Stretch, noting that curveballs would be part of the journey, particularly in midterm election years, when policy noise and market crosscurrents tend to intensify.

And yet, despite these curveballs, markets have remained fiercely resilient. The market appears to have adapted to heightened Washington headlines. After the tariff shock last April – when selling based on extreme views proved to be the wrong decision – investors are less inclined to react reflexively to each new narrative. Recent experience has reinforced a familiar lesson: headlines change quickly; trends do not.

Cutting through the noise, the foundation of this bull market remains intact. Earnings are the north star. The good news here is these earnings trends are broadening globally.

Acting on the evidence – Recent House Views changes

Given the evolving leadership, we made several important House View updates in late January, reflecting shifts in the weight of the evidence.

Emerging markets upgraded to neutral

Despite the recent rally, emerging markets (EM) have significantly lagged over a longer-term horizon, leaving upside potential. Since its October 2007 peak, EM is up roughly 14%, compared to about 350% for the S&P 500.

The upgrade reflects a technical breakout (absolute and relative), attractive valuations, and notable improvement in earnings trends. EM also offers a partial hedge from a weaker U.S. dollar.
 

As the evidence shifted in late January, we upgraded emerging markets to neutral and downgraded gold to neutral.

Gold downgraded to neutral in late January near highs

Our positive stance on gold since early 2024 has played out. By late January, gold was up roughly 100% over the prior year and had become historically stretched, trading more than 40% above its 200-day moving average. These conditions left gold in a vulnerable position and was a key factor behind our downgrade in late January. Gold subsequently had one of its worst single-day sell-offs in history.

That said, gold continues to serve as a strategic portfolio diversifier, though following such an extended position, we anticipate a choppy near-term period as it resets.

Global bull market underway

Participation across global markets has improved, with emerging markets and international developed markets at fresh record highs and U.S. stocks trading near a record, supporting the view that this advance has become a more global equity cycle. The broadening in price action is supported by a broadening of earnings strength within the U.S. and abroad.

Asset class and sector broadening

We highlighted in our 2026 outlook that holding exposure to small caps was important given our expectation of another year of sharp rotations and considering how much they have trailed. Notably, we have seen this and other areas that were laggards last year, outperform early into the new year, partially on the potential of an economic uptick.

At the sector level, participation has widened meaningfully. While technology remains an important pillar of this bull market, leadership is no longer confined to a handful of areas. This shift has been reflected in our outlook, where we boosted our view of economically-sensitive sectors, such as industrials to attractive, and energy and materials to neutral in December.

Divergence within technology

While the market is broadening overall, divergence within technology is increasing, reflected in weakening relative performance versus the broader market.

We maintain our long‑held positive view on technology and communications services but are closely monitoring signs of further deterioration that could shift our view, including our modest growth bias. Earnings remain strong, while relative valuations have fallen to their lowest level since 2021.

That said, technology is no longer monolithic, making selectivity key. The old refrain was that software would eat the world; today, the concern is that AI may eat software – compressing pricing power and disrupting business models – even areas such as semiconductors and memory trade at record highs.

Risk dynamics

Even with impressive resilience, risks remain. Policy volatility is likely to intensify as the midterm election approaches. Interest rates and earnings continue to be two of the most important variables to monitor.

Another risk worth highlighting is elevated investor sentiment. Optimism has risen and downside protection has become less in demand. High sentiment does not end bull markets, but it can leave markets more vulnerable to pullbacks when expectations are stretched.

Bottom line

Yes, the carousel of concerns continues to turn. But thus far, markets have absorbed the noise because the fundamentals – particularly earnings and breadth – continue to do the heavy lifting.

The broadening we are seeing globally and across sectors is constructive and suggests a greater pool of opportunities. Even with the potential of periodic pullbacks, the bull market still deserves the benefit of the doubt.

As always, we will continue to follow the weight of the evidence and keep an open mind.