Narratives and facts support non-US stock markets

Markets are influenced by a constant interplay between short‑term narratives and the underlying fundamentals that drive long‑term outcomes. At times, these narratives harden into genuine

structural tailwinds or headwinds that shape market returns over many years. In other cases, they prove temporary, fading as attention shifts and fundamentals reassert themselves.

Currently, markets are showing evidence of both an overreaction to narratives and, in some areas, a clear alignment between narrative and structural support. It’s in the latter where long-term investors could be rewarded. In the former, where emotion is running high, investors may want to be cautious.

Emotions play a role in the market’s AI reaction

The recent wild swings in certain stocks, sectors, and country stock indexes reflect investors grappling with how the terminal value of businesses may be disrupted, or even destroyed, by advances in AI.¹ Many software and technology names have been hit hard,² reportedly in response to stories about AI tools undermining business models and displacing knowledge workers. This isn’t to say these concerns lack merit, or that some conclusions won’t ultimately prove correct. We must recognize, instead, the inherent uncertainty in these narratives and resist treating them as firm forecasts.

It’s understandable that emotion plays a role. The pace of change is extraordinary and, for many, deeply personal. As knowledge workers (and one of us a parent of teenagers), we know that this is an emotional subject. Yet earnings data, and even analyst earnings expectations, haven’t meaningfully deteriorated. Last Wednesday, Nvidia closed out the fourth-quarter earnings season with strong results, reinforcing that demand for data centers, chips, and related infrastructure remains robust. Despite this, Nvidia shares fell the day after.³

Improving narratives and fundamentals for non-US stocks

As Economist John Maynard Keynes’ quote reminds us, “markets can stay irrational longer than you can stay solvent.” There’s little value in trying to be a hero. We have greater confidence today outside the US. Emerging markets, Japan, and even Europe stand out, in our view. In these regions, narratives have been improving, structural fundamentals have been strengthening, and, crucially, valuations have been less stretched and positioning far less crowded.⁴

Japanese stocks have continued to perform strongly.⁵ The near‑term narrative centers on increased policy support from a new government with a strong majority. More importantly, the structural case remains compelling. Corporate governance reforms and shareholder return, particularly higher returns on stocks,⁶ have improved since former Prime Minister Shinzo Abe launched his reform agenda.⁷ Both domestic and foreign investor participation have continued to rise.

Emerging markets have long carried a compelling growth narrative, albeit with higher volatility, in our view. Today, key structural forces, such as a weaker US dollar⁸ and improving corporate governance, have been aligning to provide additional support. Within emerging markets, performance leadership

has been clear. Emerging market stocks continued to outperform last week, with Korea standing out.⁹ The Korean Stock Exchange Index (KOSPI) rose more than 75% in 2025 and has gained nearly another 50% in just the first two months of this year.¹⁰ Korea is now the ninth‑largest global stock market.¹¹

Korean stocks have been buoyed by the sustained boom in demand for semiconductors and memory. Currently, we see few obvious clouds on the horizon. Export growth remains strong,¹² while steady domestic inflation suggests the Bank of Korea can keep policy rates on hold for some time.

Markets are narrative‑driven. Our task is to identify where we have the greatest confidence that narratives and facts are converging. From that perspective, the story we’ve been telling for many months remains intact. We believe non‑US markets, including emerging markets, Japan, and Europe, have the potential to continue to reward investors.

How might the Iran story unfold?

With just two months behind us, 2026 is already providing many twists and turns, including the US and Israel military strikes on Iran. (Read US-Israel Strikes on Iran: What investors need to know.) How this story unfolds is highly unclear at this stage, but history suggests that such geopolitical shocks and twists might initially be negative for risk assets, including stocks. But in the medium term, staying invested may be the best course of action, in our view, as markets have tended to rebound after peaks in geopolitical risk.