MARKET INSIGHTS

Weekly market commentary

23/feb/2026
  • BlackRock Investment Institute

New return drivers in Japan, Europe

Market take

Weekly video_20260223

Roelof Salomons

Portfolio Strategist, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

Camera frame

Markets are laser-focused on the AI buildout – but we see other forces at work as well. Geopolitical fragmentation has Japan and Europe ramping up fiscal spending, creating new return drivers.

Title slide: New return drivers in Japan, Europe

1: In Japan, a structural slow burn – not a sugar rush

In Japan, we are overweight equities. Return on equity has steadily risen, narrowing the gap with the US and Europe. And this is not just a sugar rush from fiscal expansion. It’s a slow-burn – it’s a structural shift. A focus on capital discipline and shareholder returns is lifting profitability. Japanese companies also have less cross-shareholdings, which makes Japan more attractive to foreign investors.

These improvements come against a backdrop of strong nominal growth and rising wages. The end of deflation has enabled firms to raise prices without losing demand. And the Liberal Democratic Party’s [historic election] win provides political continuity and paves the way for more fiscal spending on national security – an example of geopolitical fragmentation, a mega force which is also at play.

2: In Europe, sector dispersion set to drive returns

In Europe, by contrast, we think overall return on equity will need to improve via productivity gains – not just one-off cyclical boosts. As a result, we’re focused on select sectors.

We favor sectors that benefit from increased defense, infrastructure and energy spending. We also like pharma. It enjoys solid earnings, low valuations – and there are growth opportunities via AI innovation and efficiencies.

Financials are another top pick. Europeans are big savers, and policymakers are making it easier for households to invest and for companies to raise capital, including through the European Savings and Investment Union. We see undervalued European financials in a prime position to channel savings into productive investments.

3: Fiscal expansion not for free

But all this fiscal expansion does not come for free in bond markets. As governments raise spending, investors are scrutinizing debt sustainability and demand more compensation for holding long-duration paper. And that shows up: It’s pressure on long-end bond yields – most visible in Japan, but also elsewhere.

Higher issuance and stickier inflation can keep [long-term] rates elevated. And that keeps us underweight government bonds, particularly at the long end, relative to equities.

Outro: Here’s our Market take

Fiscal expansion tied to geopolitical fragmentation is creating return drivers outside of AI. We prefer Japanese equities over government bonds. And in Europe, we focus on sectors that benefit from fiscal stimulus and sectors where profitability and growth isn’t priced in, like pharma and financials.

Closing frame: Read details: blackrock.com/weekly-commentary

More mega forces at play

Other mega forces are driving returns beyond AI. This keeps us overweight Japanese stocks, while we favor pharmaceuticals and financials in Europe.

Market backdrop

The US Supreme Court struck down the use of emergency powers to impose tariffs. The administration is already taking other measures to reimpose them.

Week ahead

Final euro area inflation data is in focus this week after the ECB held rates steady. We see policy rates on hold through 2026 if inflation slips below 2%.

Markets are laser-focused on the AI buildout, but opportunities shaped by other mega forces abound. Case in point: Japan and Europe are ramping up fiscal spending to boost self-sufficiency amid geopolitical fragmentation. Fiscal expansion is just one reason to gain exposure to this evolving trend. In Japan, sustained corporate reforms underpin our overweight to equities. In Europe, we focus on equity sectors, favoring infrastructure, pharma and financials.

Market commentary Asset class views
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Japan’s regime shift

Return on equity, 1975-2026

Japan’s return on equity has climbed steadily over decades, narrowing the gap with the US and Europe. That points to structural forces at play -- not just a sugar rush from fiscal expansion.

Source: BlackRock Investment Institute with data from LSEG Datastream, February 2026. Implied aggregate return on equity derived from index valuation ratios based on MSCI country equity indices.

International developed market stocks are outperforming this year, after walloping US counterparts last year. Is it too late to jump in? We don't think so. Japan’s return on equity (ROE) has steadily moved higher, narrowing the gap with the US and Europe. See the chart. This is not just a sugar rush from fiscal expansion. It's very much a slow-burn, structural force: A focus on capital discipline and shareholder returns is lifting underlying profitability. Japanese companies are now focused on maximizing profits, rather than minimizing debt. And a steady decline in corporate cross-shareholdings is making Japan more attractive for foreign investors. In Europe, we think overall ROEs will need to improve via productivity gains - rather than being juiced by one-off cyclical boosts. We’re focused on sectoral opportunities in the region as a result.

Japan's corporate improvements are taking shape against a benign macro backdrop of strong nominal growth plus fiscal spending. Wages are rising, and the end of deflation has allowed companies to raise prices without losing demand. We see the historic election win for Prime Minister’s Sanae Takaichi’s Liberal Democratic Party offering continuity and predictability on this front. The LDP’s majority supports increased fiscal spending on the economy and national security. That fiscal trajectory sits within the geopolitical fragmentation mega force: it’s pushing economies toward capacity building, as nations try to become more self-sufficient. This broadening shift was on display at the recent Munich Security Conference.

Eyeing select sectors in Europe

In Europe, we like sectors that benefit from this increased spending on defense, infrastructure and energy, as we outlined in "What’s needed for Europe’s investment renaissance." We see sectoral dispersion driving performance. Pharma is a prime example: the segment has solid earnings, low valuations relative to history and growth prospects thanks to AI innovation and a rapidly greying population. Financials are another top pick. Europeans are big savers and policymakers are making it easier for households to invest - a shift also underway in Japan via the Nippon Individual Savings Account (NISA) program - and for companies to raise capital through initiatives such as the EU’s Savings and Investment Union (SIU). We see undervalued European financials poised to channel these savings into productive investment.

The key risk: fiscal expansion does not come for free in bond markets. Investors are scrutinizing debt sustainability and demanding more compensation to hold long-duration paper as governments raise strategic spending. That shows up as higher term premia and upward pressure on long-end yields, most visibly in Japan but increasingly relevant elsewhere. Beyond this, higher issuance and stickier inflation can keep long rates elevated. That is why we stay underweight government bonds, particularly at the long end, relative to equities.

Our bottom line

Fiscal expansion tied to geopolitical fragmentation is creating return drivers outside of AI. We prefer Japanese equities over government bonds on a combo of corporate reforms and fiscal support. In Europe, we see sector dispersion driving outcomes. We focus on stimulus beneficiaries such as infrastructure, as well as pharma and financials.

Market backdrop

The Supreme Court ruled against the Trump administration’s use of emergency powers to impose tariffs, as expected. The decision doesn’t change the administration’s focus on trade as central to its economic and strategic policy, in our view. The White House quickly moved to use other measures to reimpose tariffs. The S&P 500 added 1% last week. Brent crude oil climbed about 6% to above $70 per barrel on the US military buildup in the Middle East amid tensions with Iran.

We’re watching whether US consumer confidence signals any change in the demand backdrop. We also look to final euro area inflation for evidence price pressures are easing after the European Central Bank held rates steady earlier this month. We expect steady growth and inflation that could drift below 2%. This should keep the ECB on hold in 2026 – a sensible choice given upward pressure on inflation from supply constraints and loosening fiscal policy.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while bitcoin is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of February 19, 2026. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.

Feb. 24

US consumer confidence

Feb. 25

Final euro area inflation

Feb. 27

US PPI

Read our past weekly commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, February 2026

Reasons
Tactical  
Still favor AI We see the AI theme supported by strong earnings, resilient profit margins and healthy balance sheets at large listed tech companies. Continued Fed easing into 2026 and reduced policy uncertainty underpin our overweight to US equities.
Select international exposures We like Japanese equities on strong nominal growth and corporate governance reforms. We stay selective in European equities, favoring financials, utilities and healthcare. In fixed income, we prefer EM due to improved economic resilience and disciplined fiscal and monetary policy.
Evolving diversifiers We suggest looking for a “plan B” portfolio hedge as long-dated US Treasuries no longer provide portfolio ballast – and to mind potential sentiment shifts. We like gold as a tactical play with idiosyncratic drivers but don’t see it as a long-term portfolio hedge.
Strategic  
Portfolio construction We favor a scenario-based approach as AI winners and losers emerge. We lean on private markets and hedge funds for idiosyncratic return and to anchor portfolios in mega forces.
Infrastructure equity and private credit We find infrastructure equity valuations attractive and mega forces underpinning structural demand. We still like private credit but see dispersion ahead – highlighting the importance of manager selection.
Beyond market cap benchmarks We get granular in public markets. We favor DM government bonds outside the US Within equities, we favor EM over DM yet get selective in both. In EM, we like India which sits at the intersection of mega forces. In DM, we like Japan as mild inflation and corporate reforms brighten the outlook.

Note: Views are from a US dollar perspective, February 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, February 2026

Legend Granular

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Asset   Tactical view Commentary
Developed markets      
United States   United States: tactical Overweight +1 We are overweight. Strong corporate earnings, driven in part by the AI theme, are supported by a favorable macro backdrop: continued Federal Reserve easing, broad economic optimism and less policy uncertainty, particularly on the trade front.
Europe   Europe: tactical neutral We are neutral. We would need to see more business-friendly policy and deeper capital markets for recent outperformance to continue and to justify a broad overweight. We stay selective, favoring financials, utilities and healthcare.
UK   UK: tactical neutral We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift.
Japan   Japan: tactical Overweight +1 We are overweight. Strong nominal GDP, healthy corporate capex and governance reforms – such as the decline of cross-shareholdings – all support equities.
Emerging markets   Emerging markets: tactical Neutral We are neutral. Economic resilience has improved, yet selectivity is key. We see opportunities across EM linked to AI and the energy transition and see the rewiring of supply chains benefiting countries like Mexico, Brazil and Vietnam.
China   China: tactical Neutral We are neutral. Trade relations with the US have steadied, but property stress and an aging population still constrain the macro outlook. Relatively resilient activity limits near-term policy urgency. We like sectors like AI, automation and power generation. We still favor China tech within our neutral view.
Fixed income      
Short US Treasuries   Short US Treasuries: tactical Neutral We are neutral. We see other assets offering more compelling returns as short-end yields have fallen alongside the US policy rate.
Long US Treasuries   Long US Treasuries: tactical underweight We are underweight. We see high debt servicing costs and price-sensitive domestic buyers pushing up on term premium. Yet we see risks to this view: lower inflation and better tax revenues could push down yields near term.
Global inflation-linked bonds   Global inflation-linked bonds : Neutral We are neutral. We think inflation will settle above pre-pandemic levels, but markets may not price this in the near-term as growth cools.
Euro area government bonds   European bonds: tactical neutral We are neutral. We agree with market forecasts of ECB policy and think current prices largely reflect increased German bond issuance to finance its fiscal stimulus package. We prefer government bonds outside Germany.
UK Gilts   UK gilts: tactical Neutral We are neutral. The recent budget aims to shore up market confidence through fiscal consolidation. But deferred borrowing cuts could bring back gilt market volatility.
Japanese government bonds   Japan government bonds: tactical Underweight -2 We are underweight. Rate hikes, higher global term premium and heavy bond issuance will likely drive yields up further.
China government bonds   China government bonds: tactical Neutral We are neutral. China bonds offer stability and diversification but developed market yields are higher and investor sentiment shifting towards equities limits upside.
US agency MBS   US agency MBS: tactical overweight We are overweight. Agency MBS offer higher income than Treasuries with similar risk and may offer more diversification amid fiscal and inflationary pressures.
Short-term IG credit   Short-term IG credit: tactical neutral We are neutral. Corporate strength means spreads are low, but they could widen if issuance increases and investors rotate into US Treasuries as the Fed cuts.
Long-term IG credit   Long-term IG credit: tactical Underweight -1 We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds.
Global high yield   Global high yield: tactical Neutral We are neutral. High yield offers more attractive carry in an environment where growth is holding up – but we think dispersion between higher and weaker issuers will increase.
Asia credit   Asia credit: tactical Neutral We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight.
Emerging hard currency   Emerging hard currency: tactical underweight We are overweight. A weaker US dollar, lower US rates and effective EM fiscal and monetary policy have improved economic resilience. We prefer high yield bonds.
Emerging local currency   Emerging local currency: tactical neutral We are neutral. A weaker US dollar has boosted local currency EM debt, but it’s unclear if this weakening will persist.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, February 2026

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Neutral We are neutral. We would need to see more business-friendly policy and deeper capital markets for recent outperformance to continue and to justify a broad overweight. We stay selective, favoring financials, utilities and healthcare.
Germany Germany: tactical Neutral We are neutral. Increased spending on defense and infrastructure could boost the corporate sector. But valuations rose significantly in 2025 and 2026 earnings revisions for other countries are outpacing Germany.
France France: tactical Neutral We are neutral. Political uncertainty could continue to drag corporate earnings behind peer markets. Yet some major French firms are shielded from domestic weakness, as foreign activity accounts for most of their revenues and operations.
Italy Italy: tactical Neutral We are neutral. Valuations are supportive relative to peers. Yet we think the growth and earnings outperformance that characterized 2022-2023 is unlikely to persist as fiscal consolidation continues and the impact of prior stimulus peters out.
Spain Spain: tactical Overweight +1 We are overweight. Valuations and earnings growth are supportive relative to peers. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI. High exposure to fast-growing areas like emerging markets is also supportive.
Netherlands Netherlands: tactical Neutral We are neutral. Technology and semiconductors feature heavily in the Dutch stock market, but that’s offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers.
Switzerland Switzerland: tactical Neutral We are neutral. Valuations have improved, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance.
UK UK: tactical Neutral We are neutral. Valuations remain attractive relative to the U.S., but we see few near-term catalysts to trigger a shift.
     
Fixed income    
Euro area government bonds Euro area government bonds: tactical neutral We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to US Treasuries. Peripheral bond yields have converged closer to core yields.
German bunds German bunds: tactical neutral We are neutral. Potential fiscal stimulus and bond issuance could push yields up, but we think market pricing reflects this possibility. Market expectations for near-term policy rates are also aligned with our view.
French OATs French OATs: tactical neutral We are neutral. France faces continued challenges from elevated political uncertainty, high budget deficits and slow structural reforms, but these risks already seem priced into OATs and we don’t expect a worsening from here.
Italian BTPs Italian BTPs: tactical Neutral We are neutral. The spread over German bunds looks tight given its large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. Domestic political pushback likely prevents defense spending from rising to levels that would resurface fiscal stability concerns.
UK gilts UK gilts: tactical Neutral We are neutral. Gilt yields are off their highs, but we expect more market attention on long-term yields through the government’s November budget, given the difficulty it has had implementing spending cuts.
Swiss government bonds Swiss government bonds: tactical Neutral We are neutral. Markets are expecting policy rates to return to negative territory, which we deem unlikely.
European inflation-protected securities European inflation protected securities: tactical Neutral We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term.
European investment grade European investment grade: tactical Neutral We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the US Quality-adjusted spreads have tightened significantly relative to the US, but they remain wider, and we see potential for further convergence.
European high yield European high yield: tactical Overweight +1 We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality and less sensitivity to interest rate swings compared with the US Spreads adequately compensate for the risk of a potential rise in defaults, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, February 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Meet the authors

Jean Boivin

Jean Boivin

Head – BlackRock Investment Institute
Ben Powell

Ben Powell

Chief Investment Strategist for the Middle East and APAC — BlackRock Investment Institute
Bruno Rovelli

Bruno Rovelli

Chief Investment Strategist for Italy – BlackRock Investment Institute
Roelof Salomons

Roelof Salomons

Chief Investment Strategist for the Netherlands and the Nordics – BlackRock Investment Institute

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