Global equity markets delivered a more uneven performance in February as the narrative around artificial intelligence evolved. While earnings from large US technology companies remained robust, investor focus shifted toward the magnitude - and timing - of the investment required to sustain AI-driven growth. Escalating capital expenditure guidance prompted a degree of profit-taking in parts of the “Magnificent 7”, with capital rotating into more economically sensitive sectors typically associated with cyclical growth. Software names were also softer amid rising debate about whether AI could disrupt existing business models rather than simply enhance them.
Encouragingly, the rotation occurred against a backdrop of resilient US economic data. Manufacturing activity returned to expansion territory, services activity remained solid, and recent inflation readings surprised modestly to the downside. Together, these developments supported expectations that the Federal Reserve may have scope to ease policy later in the year, provided disinflation continues.
European markets were comparatively strong. Equity gains were underpinned by stabilising economic indicators and increasing conviction that the European Central Bank is approaching the end of its tightening phase. The Euro STOXX 50 rose 3.2% over the month. In the UK, the FTSE 100 climbed 6.7% to a record high, as investors positioned for potential rate cuts from the Bank of England later in the year, even though inflation remains above target. Central bank meetings in both regions emphasised a cautious, data-dependent approach, reinforcing the view that while policy rates are likely at or near their peak, any easing will hinge on sustained progress in bringing inflation back toward target.
Across Asia, returns diverged markedly. Hong Kong’s Hang Seng Index declined 2.8%, weighed down by persistent fragility in China’s property market and uneven domestic demand in mainland China. In contrast, Japan’s Nikkei surged 10.4% to a fresh record high, supported by ongoing corporate governance improvements, solid earnings growth and a weaker yen, which continues to bolster exporter profitability and attract international capital.
Geopolitical developments also remained in focus. Renewed discussions around Iran’s nuclear programme introduced another layer of uncertainty into energy markets, with investors monitoring the potential implications for oil supply and regional stability. These concerns were proven well-founded as the US and Israel launched their attack on Iran as February was drawing to a close.
US markets
In the United States, the S&P 500 fell 0.9% over the month, while the technology-heavy Nasdaq dropped 3.4%. The Dow Jones outperformed, rising 0.2%, and small-cap stocks were firmer, with the Russell 2000 gaining 0.7%.
US markets were choppy as investors continued to reassess the economics of the AI build-out. Alphabet and Amazon both delivered strong earnings, but their shares weakened as the market digested materially higher capital expenditure plans tied to AI infrastructure. In contrast, names outside of super-cap tech and software were more in favour. The Dow Jones crossed 50,000 for the first time, highlighting improving confidence in the “old economy” and a broadening of market leadership beyond technology.
Economic data was generally supportive. The ISM manufacturing PMI moved back into expansion for the first time in 12 months, reaching its highest level since August 2022, with new orders particularly strong. Services activity also remained resilient, marking 19 consecutive months of expansion. The US economy created 130,000 jobs in January - more than double forecasts and a reassuring sign that hiring demand remains intact.
Inflation data provided a welcome positive surprise. Headline CPI eased to 2.4% annually in January, down from 2.7% in December and the lowest level since May last year. Markets had expected around 2.5%, so the result represented a modest but meaningful undershoot. Core inflation (which strips out food and energy and is closely watched by the Fed) fell to 2.5%, its lowest level since April 2021. Treasury yields eased following the release, and expectations for rate cuts later this year firmed.
Meanwhile core PCE, the Federal Reserve’s preferred inflation gauge, rose to 3.0% in December - above expectations and still well above the Fed’s 2% target. At the same time, growth has cooled. Fourth-quarter GDP expanded at an annualised rate of 1.4%, below the 2.5% expected, with the government shutdown shaving around one percentage point off activity. Even before the conflict in Iran broke out, the Fed was . navigating a delicate mix of softer growth, moderating but still-elevated inflation, and ongoing political noise. Markets nevertheless continued to expect rate cuts later this year.
Trade and political developments added to the policy backdrop. The US Supreme Court ruled that President Trump’s reciprocal tariffs were unconstitutional. The White House responded by pivoting to a temporary universal tariff under an alternative trade provision - initially set at 10% and later flagged to rise to 15% - though limited in duration without Congressional approval. While the trade landscape remains “fluid,” the ruling was viewed as reinforcing institutional guardrails and may help reduce the risk of a renewed tariff-driven inflation spike at the margin.
Geopolitical tensions also moved back onto investors’ radar toward the end of the month amid renewed focus on Iran’s nuclear programme. Rhetoric intensified after President Trump singled out Iran during his State of the Union address. The sharper tone underscored the risk of escalation in the Middle East, which has since played out. Oil prices have surged on supply concerns, and markets have been reminded that alongside inflation, growth and interest rates, geopolitical developments remain an ever-present variable for global risk sentiment.
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Australian economy
The ASX 200 surged 3.7% over February, closing at a new record high as strong corporate earnings and resilient economic data underpinned investor confidence. Gains were broad-based, led by banks and miners, while industrial and consumer-facing stocks also contributed as the reporting season concluded with a clear skew toward earnings beats and upgrades.
A key development during the month was the Reserve Bank of Australia’s decision to raise interest rates by 0.25% to 3.85%. The RBA has effectively shifted back toward tightening as inflation has re-emerged as the dominant concern. Headline inflation rose to 3.8% over the 12 months to December, the highest level in six quarters and up from 3.4% previously. Core inflation has also re-heated, with the trimmed-mean measure rising 0.9% in the December quarter and 3.4% year on year, remaining above the 2–3% target band and slightly exceeding expectations.
Labour market data remained firm. The unemployment rate held steady at 4.1% in January, while the quality of employment improved, with full-time roles increasing by 50,000 and part-time employment declining by 33,000. Economic growth has also since surprised on the upside. A stronger-than-expected GDP print in March has highlighted ongoing momentum in the economy, supported by public spending and stable private demand. The robust growth figures are likely to strengthen the RBA’s confidence that the economy can withstand tighter policy settings and may keep the door open to further rate increases should inflation remain sticky.
The February reporting season was one of the strongest in recent years, with earnings beats outnumbering misses by roughly two to one. Guidance upgrades exceeded downgrades by three to one. As a result, consensus earnings growth expectations for the ASX 200 have risen materially over recent months, with forward earnings momentum now at its strongest pace since mid-2022.
Geopolitical tensions also remained a background risk during the month, particularly the conflict in the Middle East. Periodic escalations have supported oil and energy prices, contributing to global inflation concerns. For Australia, higher energy prices present both opportunities and risks - supporting resource earnings while potentially adding to domestic price pressures.
NZ economy
The NZX50G rallied 2.2% during the month, supported by further signs that economic momentum is gradually improving and a Reserve Bank meeting that proved more dovish than many had expected.
Manufacturing remains firmly in expansion. The BNZ–BusinessNZ Performance of Manufacturing Index (PMI) held at a strong 55.2 in January, sustaining December’s sharp lift, with production leading at 56.6 (readings above 50 indicate expansion). This suggests factories are operating at a healthy pace and that activity is broadening beyond just primary industries.
The labour market, however, continues to lag the wider recovery. The unemployment rate rose to 5.4%, the highest level in a decade. Importantly, this increase largely reflects higher participation, suggesting confidence is beginning to return as more people re-enter the workforce. Wage growth remains subdued at around 2% annually, a development that will be welcomed by the RBNZ as it works to ensure inflation pressures remain contained.
Encouragingly, dairy prices have strengthened at the first four (now five following the first one in March) Global Dairy Trade auctions of the year, prompting Fonterra to lift the midpoint of its 2025/26 Farmgate Milk Price forecast from $9.00 to $9.50 per kg of milk solids. In addition, tourism continues to power ahead, with overseas visitor arrivals reaching 3.51 million in 2025, up 196,000 on the prior year and now sitting at roughly 90% of pre-Covid levels. Net migration also appears to be stabilising.
Despite these positives, the recovery remains uneven and off a low base. Housing activity softened at the start of the year, with REINZ reporting national sales volumes down 5.4% year-on-year, prices easing and days to sell lengthening. Retail spending also showed signs of fatigue following the discount-driven year-end period, with electronic card spending falling 1.1% in January.
Corporate earnings have mirrored this uneven backdrop. The reporting season opened strongly, with Skellerup and Freightways delivering solid results, while other local names such as Fletcher Building, Spark and SkyCity Entertainment produced more mixed outcomes.
The RBNZ meeting was a key focal point. The Bank left the OCR unchanged but struck a notably more dovish tone than expected, tempering forecasts for further rate hikes. Some commercial banks had moved aggressively in pricing additional tightening; that narrative has now softened. The RBNZ’s message was clear: while parts of the economy are improving, conditions remain patchy and inflation is easing gradually. There is no urgency to tighten policy further.
Markets have since pared back expectations of additional hikes, shifting the focus from how much higher rates may go to how long they will remain steady. A pre-election rate hike now appears unlikely, with any further move potentially pushed well into 2027.
Overall, the data support the RBNZ’s stance - green shoots are visible, but the recovery is still in its early stages and far from broad-based. And now there is also a major conflict in the Middle East to contend with.
Looking ahead, and the conflict in Iran
The recent US-Israeli strikes on Iran, and the retaliation across the region, has unsettled global markets. Oil and gas prices have jumped, while many major equity markets have been volatile. Although US markets, on balance, have held up better.
While the media headlines and images are clearly disconcerting, there appears to be a disconnect between them and how some markets are currently assessing the conflict. It remains to be seen how events unfold in the coming weeks, but for long-term investors, the case to “stay the course” remains paramount.
The initial stock market reaction (particularly in the US) has been more measured than many feared. Overall, it appears that investors (in the US at least) may be pricing in a contained scenario rather than a full-blown regional escalation. The S&P500 fell just 2% in the first week of the war. Time will tell how this plays out, but at this early stage, US markets seem to be taking the view that the conflict will not be prolonged.
For global markets, the key transmission channel is not the military headline itself. It is energy supply. Iran accounts for roughly 3% of global oil production, but the greater concern is geography. Iran sits alongside the Strait of Hormuz, the narrow chokepoint through which about 30% of the world’s oil and gas exports pass each day.
However, there is an important difference between a spike in risk premium and a sustained supply shock.
If this conflict proves short and contained - measured in weeks rather than many months - volatility in oil and gas could fade quickly. However, if energy flows through the Strait of Hormuz were materially disrupted for a prolonged period, oil and gas prices could spike significantly higher. It could also create supply chain issues for other goods, including petrochemical feedstocks. That would likely push inflation up again, complicate central bank policy, squeeze consumers, and potentially slow global growth.
That is the genuine downside scenario. Until there is evidence of sustained disruption, what we are largely seeing is uncertainty being repriced across the broader energy complex.
It is also worth noting that the world’s major oil-producing nations (represented by OPEC+) have little interest in seeing a sustained surge in energy prices that damages the global economy and ultimately destroys demand. The group has already agreed to resume production increases next month, adding more than 200,000 barrels per day. OPEC+ retains the ability to increase supply further if needed.
At the same time, global LNG supply is more diversified than it was a decade ago. Markets are pricing energy risk, but that does not yet equate to an energy crisis.
European gas prices have rallied but remain around one-sixth of the levels seen in the wake of Russia’s invasion of Ukraine. Meanwhile, the West’s reliance on Middle Eastern oil is not as heavy as it once was. The shale revolution has transformed the US from a major net importer of oil and gas into one of the world’s key exporters.
Activity in the Strait of Hormuz has been constrained since the conflict began for two reasons: fear of attacks, and a lack of insurance cover (with war-risk cover cancelled by many maritime insurers). However, President Trump has ordered the U.S. Development Finance Corporation to provide political risk insurance and guarantees for maritime trade, particularly energy, travelling through the Gulf. He has also offered for the US Navy to escort tankers through the Strait if necessary.
This provides a potential pathway for shipping activity to resume more normally.
Political shocks such as these often feel like turning points. Markets however tend to treat them differently.
When Donald Trump was first elected, many predicted prolonged instability. Despite trade wars, tariff escalations and political turbulence, US equities rallied strongly in the years that followed (the S&P500 rose by nearly 50% from his inauguration through to the onset of Covid).
More recent tariff shocks followed a familiar pattern. After “Liberation Day” tariffs were announced last April, markets initially sold off sharply as investors priced in slower growth and higher inflation. Once it became clear that the most extreme outcomes were unlikely, equities recovered and had a very strong year (the S&P500 rose over 15% in 2025).
The same dynamic played out during the Ukraine war. When Russia invaded in February 2022, the S&P 500 fell about 18% through to October that year as commodity prices surged and recession fears intensified. It felt ominous at the time. Today, the index sits nearly double its October 2022 lows and roughly 60% above its pre-war level.
For investors who stayed invested, losses proved temporary.
Markets tend to discount fear quickly. They also adjust quickly when reality proves less severe than initially feared. It is also for these reasons that renowned investor Warren Buffett has often described macroeconomic forecasts and political drama as “expensive distractions.” Buffett has said that wars, recessions and crises are recurring features of history. Yet historically, they have not justified selling high-quality businesses at distressed prices.
That mindset is especially relevant for KiwiSaver (and long-term investors generally). It is not a short-term trade. It is a decades-long investment programme designed to build retirement wealth over time.
Markets have powered through previous crises
It is worth remembering that market crises are very common.
Over the past 150 years, there have been a catalogue of downturns triggered by wars, oil embargoes, credit crises, inflation shocks, speculative bubbles bursting, and pandemics. Each episode felt unprecedented. Bu teach was followed by recovery. Over the long term, equities have proven resilient. The chart below highlights this – and the “wall of worry” that the S&P500 has climbed over the past 40 years.
What this means for KiwiSaver, and other investments
Markets may be bumpy in the weeks ahead.
Short-term volatility can be a stern test of emotions. Blaring headlines and falling prices create a powerful urge to “do something.” Yet history consistently shows that investors who stay the course during periods of stress are rewarded for their patience. Markets often start to recover not when the news-flow improves, but when expectations have become too pessimistic.
Time in the market has consistently mattered more than timing the market.
Unless tensions escalate into a sustained disruption of global energy supply, history suggests that longer-term market drivers - corporate earnings, innovation, productivity growth and monetary policy - tend to outweigh short-term geopolitical shocks. While events in the Middle East can generate sharp moves in oil prices and risk sentiment, markets often stabilise once worst-case scenarios fail to materialise.
Periods of heightened uncertainty frequently see risk premia rise, and downside scenarios priced in quickly. For disciplined, long-term investors, that volatility can create opportunity. The Generate Investment Team remains vigilant and prepared to take advantage of any dislocations that may emerge, selectively deploying capital where quality businesses are temporarily mispriced. Maintaining perspective during geopolitical flare-ups is critical - and experience shows that patience and investing on share price weakness will be rewarded once uncertainty subsides.