February 2026: Markets, geopolitics, and a war in Iran

February 2026: Markets, geopolitics, and a war in Iran

February 2026 was a month that began with diplomatic brinkmanship and ended with war. Whilst global equity markets delivered mixed results, the dominant stories were the continued rotation away from US equities, a Supreme Court ruling that upended American trade policy, and a dramatic escalation in the Middle East that culminated in joint US-Israeli military strikes on Iran on the final day of the month.

The ‘Ex-America’ trade continues

February reinforced the market leadership shift that defined January. Global equities as a whole delivered a positive return even as the S&P 500 slipped 0.8% for the month. Developed market equities outside the US gained strongly, with European indices posting solid advances despite ongoing global uncertainty. The US dollar continued to weaken broadly, providing an additional tailwind for internationally diversified investors.

This divergence between US and non-US equities is no coincidence. Valuation differentials remain significant, with European and emerging market equities trading at meaningful discounts to their US counterparts. Meanwhile, fiscal stimulus programmes in Europe, particularly in defence and infrastructure, are beginning to show up in corporate earnings. 

In terms of style, value outperformed growth within the US, and momentum rebounded across most regions. The US dollar’s continued weakness amplified USD-denominated returns for investors holding non-US assets, providing an additional boost to globally diversified portfolios.

Global equity indices chart

FTSE 100 remains near record territory

The FTSE 100, which broke through the historic 10,000 level for the first time in January, remained elevated throughout February, climbing toward near-record levels once again by month end. The index benefited from its defensive characteristics and international revenue exposure, with large-cap dividend-paying stocks in demand amid global uncertainty.

UK corporate earnings season delivered some notable bright spots. Rolls-Royce presented a 40% increase in year-on-year (YoY) earnings. Defence and aerospace stocks broadly remained well supported, consistent with the ongoing European rearmament theme.

The US-Iran conflict erupts

The defining event of February 2026, and arguably the most significant geopolitical development in years, was the eruption of direct military conflict between the United States and Israel against Iran. The tensions that had been building throughout January culminated dramatically on 28 February, when the US and Israel launched coordinated joint strikes on Iran.

The strikes targeted Iranian leadership, military facilities, and nuclear infrastructure. Iran retaliated with missile and drone strikes on US military bases across the region and on Israel, whilst also launching strikes on other Middle Eastern nations such as the UAE. Brent crude oil prices rose sharply, climbing from around $70 to over $80 per barrel within days, as markets priced in the risk of disruption to the Strait of Hormuz, through which approximately 20% of global oil passes. Financial markets broadly moved into risk-off mode.

Brent crude chart

US Trade Policy: The Supreme Court Earthquake

February also delivered a large development on the trade policy front. On 20 February, the US Supreme Court ruled 6-3 that the International Emergency Economic Powers Act does not authorise the President to impose tariffs, striking down the broad set of tariffs that had been imposed on trading partners including China, Canada, Mexico, and the EU. 

President Trump responded swiftly, announcing a new 10% global tariff under Section 122 of the Trade Act of 1974, effective from 24th February. For UK and European businesses, the Supreme Court’s ruling and subsequent Section 122 tariff represent a partial easing of trade tensions compared to the peak tariff regime, though uncertainty remains elevated. The situation continues to evolve rapidly, and any further escalation tied to the Iran conflict could prompt further policy responses from both the US and its trading partners.

UK Inflation and Interest Rate Outlook

The Bank of England (BoE) held interest rates at 3.75% at its 5 February meeting, in a notably close 5–4 vote. Four members favoured an immediate 25 basis point cut, a more dovish outcome than the 7-2 split most economists had forecast. The Bank signalled that further cuts are likely later in 2026, with markets now pointing to the April meeting as the most probable date for the next reduction.

UK inflation has begun to ease more meaningfully. The consumer price index (CPI) reading for January 2026 came in at 3.0%, down from 3.4% in December 2025, a move in the right direction. The Bank now projects inflation returning to its 2% target by June 2026  a significantly earlier timeline than its previous forecast of quarter two (Q2) 2027. Markets currently price in one to two further quarter-point cuts in 2026, with base rate potentially settling in the 3.25% - 3.5% range by year end. 

The European Central Bank (ECB), meanwhile, held its deposit rate at 2.0% at its February meeting. That said, renewed energy price pressures stemming from the Iran conflict have complicated the outlook for central banks globally.

Gold: Another Extraordinary Month

If January was remarkable for gold, February was extraordinary. After starting the month at approximately $4737 per ounce, gold experienced significant volatility in the first week before staging a powerful recovery, closing the month at $5278 a gain of 11.4% in just 30 days. The late-February surge was directly driven by the escalation of the US-Iran conflict, which sent investors scrambling for safe-haven assets.

Gold’s structural drivers remain strongly intact. A weakening US dollar, elevated geopolitical risk, and continued uncertainty around the trajectory of global interest rates all support the metal. Over the past year, gold has risen by more than 70%, an exceptional run that has rewarded investors willing to hold diversified, multi-asset portfolios. When converted back into sterling, the returns have been even more pronounced given relative currency movements.

The Benefits of Diversified Portfolio Management

February’s market performance was a powerful demonstration of the value of genuine diversification. Whilst the US equity market slipped modestly, portfolios with meaningful exposure to global equities and gold captured strong returns. The ongoing rotation in market leadership, away from concentrated US mega-cap technology positions toward broader global exposure has been a consistent theme since the start of 2026, and February reinforced it emphatically.

IG’s Smart Portfolios had another solid month, with the portfolios producing broadly positive returns across risk levels. Key contributors included European equities, gold, and international developed market exposure, all of which benefited from the dollar weakness and broader non-US equity momentum. The dramatic late-month gold surge, driven by the Iran conflict, provided a timely reminder of why holding safe-haven assets alongside growth-oriented positions can meaningfully reduce portfolio volatility in times of stress.

Smart Portfolio performance chart

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Sources: Bloomberg, FTSE Russell, Bank of England, Office for National Statistics, Yale Budget Lab at Yale University, MSCI, Chatham House, Council on Foreign Relations, Kitco (all data as at 28th February 2026)