Key takeaways
- The MSCI World Index rose 0.73% in February, but performance diverged sharply across sectors, regions, and individual stocks.
- AI-driven disruption pressured software companies, while infrastructure and asset-based businesses outperformed.
- The escalation of war with Iran has reintroduced geopolitical risk, with energy markets and emerging markets particularly sensitive to further developments.
- We believe diversification across styles, regions, and managers is increasingly important as structural and geopolitical risks rise.
February ended with a sharp escalation in conflict involving Iran, putting geopolitical risk back on investors’ radar and unsettling energy and emerging markets. But for most of the month, performance was driven largely by continued rotation tied to AI disruption and shifting earnings expectations. Dispersion was already widening across sectors and regions before geopolitics moved back to the forefront.
SaaS-Apocalypse? Rotation continues in global equities
The MSCI World Index eked out a 0.73% gain in February, but that modest return masks meaningful rotation This is becoming a market that rewards selectivity. As AI reshapes competitive dynamics, investors are distinguishing more sharply between durable business models and those facing structural pressure. Broad exposure to “technology” or even to the AI theme itself has become less reliable than company-level differentiation.
That differentiation showed up clearly in sector leadership. Investors favored asset-based value sectors such as materials, energy, and utilities, along with yield-oriented companies viewed as less exposed to AI disruption. Within technology, dispersion intensified. Software-as-a-service (SaaS) companies including Salesforce, Adobe, and ServiceNow extended their declines as investors assessed whether AI represents a structural threat to established software models.
By contrast, companies tied more directly to AI infrastructure outperformed. Fiber optics firms such as Corning and Fujikura, along with chip supply chain companies including Applied Materials and ASML, saw relative strength.
Even within the so-called Magnificent Seven, leadership fractured. Apple and NVIDIA contributed positively to MSCI World returns, while Amazon, Alphabet, Microsoft, and Meta detracted.
For active managers, this is not a thematic market — it’s a selective one. Many SaaS firms retain sticky customer bases and proprietary data and plan to embed AI into their own offerings. The key question is execution. Managers are evaluating which companies can defend margins and monetize AI capabilities, and which may face structural erosion.
Regional leadership broadens
Geographic concentration is becoming a more material risk. Non-U.S. markets again outperformed in February, led by Asia and emerging markets, extending a rotation away from the narrow U.S. mega-cap leadership that defined much of the past cycle.
Managers with global flexibility are reallocating capital where fundamentals and policy tailwinds are stronger. The opportunity set is widening, and we think portfolio construction needs to reflect that shift.
We continue to believe structural forces — deglobalization, a return to more normalized interest rates, and fiscal spending focused on infrastructure, reshoring, and defense — are expanding the opportunity set beyond U.S. mega-cap technology. AI disruption is reinforcing these dynamics by redirecting capital spending across industries and regions rather than concentrating it in a single geography. For diversified global portfolios, this matters. Concentration in a narrow segment of U.S. growth equities increases sensitivity to both valuation compression and thematic reversals. Broader regional exposure introduces differentiated economic drivers and sector composition.
Iran and the return of geopolitical risk
The escalation of war between the U.S., Israel, and Iran adds a new layer of uncertainty. The duration and scope of the conflict remain unclear. Regardless, we believe this episode reinforces the case for diversification. Geopolitical shocks often expose concentrated positioning. Multi-style, multi-region exposure can help mitigate single-source risk while preserving participation in areas of strength.
Initial market reactions centered on the unwinding of crowded trades. Gold and metals sold off sharply. Emerging markets, particularly countries vulnerable to energy price shocks, came under pressure. Oil and energy equities moved higher.
Our base case for at-trend or above-trend growth remains intact for now. The primary downside risk lies in escalation or prolonged disruption. Iran’s potential ability to disrupt oil and gas flows through the Strait of Hormuz represents the most significant macro watchpoint.
Investor implications
AI disruption and the Iran conflict are distinct shocks, but they point to the same conclusion: portfolios heavily concentrated in a narrow segment of the market are becoming increasingly vulnerable.
A diversified global equity allocation — spanning styles, sectors, regions, and multiple active managers — can provide resilience in a market defined by rotation and dispersion. As leadership fragments, portfolio outcomes may depend less on owning a theme and more on how exposures are constructed within it.
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Important information pertaining to the hypothetical example: Past performance does not predict future returns. Return level is proportionately scaled in line with cash level to be overlaid. Source: Russell Investments. Assumptions: Average cash level 1.0%, 10-year history from 12/31/2023, gross of fees. Opportunity cost from not securitizing cash varies by asset allocation and time period, and is represented by horizontal bars as marked within the chart legend. Target asset allocation used: 0% cash, 74% MSCI World, 26% Global Aggregate (GBP Hedged). For illustrative purposes only. Does not represent any actual investment. Indexes are unmanaged and cannot be invested in directly. Performance benefit (net) of overlaying cash by last 5 individual calendar year is as follows: 2023:20 bps, 2022:-17bps, 2021:16bps, 2020:14bps, 2019:23bps.
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