February built on January’s move toward a more selective market. Inflation and central bank policy divergence remained the dominant backdrop, but the month added new catalysts: a landmark US Supreme Court ruling on tariffs, a volatile technology earnings season, and military action flared up between the US, Israel and Iran on the last day of February.

Rather than a broad risk-off move, February was defined by rotation. Commodities and defensive exposures gained ground, while parts of the technology sector, specifically software, faced valuation pressure as investors began demanding evidence of AI profitability, not just AI narrative.

Key policy developments:

  • Tariff Reset: On 20 February, the US Supreme Court overturned the Trump Administration’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA), finding they exceeded presidential authority. Within hours, President Trump moved to a flat 15% global tariff under Section 122 of the Trade Act of 1974, reducing the overall burden versus the IEEPA regime (particularly for China) and helping trigger a late?month rally in Australian materials and lithium stocks. Tariffs remain a structural feature of global trade, but the legal framework has changed.
  • The Gold Rally: Gold was the month’s standout trade, benefiting from a trifecta of geopolitical risk, currency volatility, and fiscal concerns.

Equity Markets

Australian equities were the standout performer in February, with the ASX 200 gaining around 4%. Strength was broad-based across an impressive domestic earnings season, with the Materials sector the clear leader – up over 8% for the month on the back of solid results from heavyweight miners.

Gold Producers led within Resources as gold prices rallied sharply. The move reflected a flight to safety following escalating tensions involving Iran, coupled with persistent concerns around sovereign debt and currency stability.

Local equity market strength occurred despite the RBA lifting interest rates by 0.25% at its February 3 meeting, its first increase since 2023, as inflation re-accelerated in the second half of 2025 and capacity pressures built.

Global equities told a different story, declining around 1% in Australian dollar terms (MSCI World Unhedged). The primary drag was US technology volatility.

Despite record earnings results, revenue up 73% year-on-year, NVIDIA fell approximately 5.5% post its earnings announcement. The reaction signalled a clear shift in investor sentiment: markets are no longer buying the AI narrative blindly and are instead demanding perfection at current valuations.

A clear divide between Software versus Hardware also emerged. Hardware providers remain the ‘picks and shovels’ of the AI gold rush however Software platforms faced selling pressure as investors questioned whether AI would compress margins or accelerate competitive disruption.

Fixed Income, Currencies and Real Assets

In a reversal of January’s trend, bond yields declined through February as investors sought defensive positioning amid geopolitical noise and equity jitters, supporting bond prices and providing meaningful diversification in balanced portfolios.

Market Outlook

February confirmed that the ‘rising tide lifts all boats’ era is behind us. Returns are increasingly dictated by sector positioning and valuation discipline rather than broad macroeconomic momentum.

We remain long-term believers in the AI structural theme. The market, however, is becoming ruthlessly selective, distinguishing between companies with clear revenue realisation and those relying on long-term storytelling.

We continue to favour quality over momentum – companies with durable earnings, pricing power, and fortress like balance sheets – alongside selective exposure to real assets and AI infrastructure where valuations remain grounded. With geopolitical risks and central bank policy divergence both elevated, we expect 2026 to continue its pattern of episodic volatility.

Post period inclusion – Iran conflict

On Saturday 28th February, simmering tensions in the Middle east escalated with coordinated U.S. and Israeli strikes on Iran. The attacks included the targeting of key military infrastructure, nuclear related sites and leadership figures including clerical leader Ayatollah Ali Khamenei who was killed in the action. In response, Iran launched retaliatory missile and drone attacks on targets across the region, including multiple U.S. bases and allied countries including Israel. The conflict remains ongoing and has escalated somewhat from the initial couple of days.

From a markets perspective oil prices have risen to in excess of US$90 per barrel as the Straits of Hormuz, a narrow waterway through which 20% of global oil consumption passes, remain closed to shipping. It is this that is having a major impact on global financial markets.

We continue to monitor the situation closely as it is not clear in which direction the conflict is taking but we expect volatility in financial markets to remain elevated until an end point becomes apparent.

 

Kind Regards,

The Research & Investment Solutions Team