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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.
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 to 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
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 U.S. 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 U.S. 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-U.S. markets, including emerging markets, Japan, and Europe, have the potential to continue to reward investors.
With just two months behind us, 2026 is already providing many twists and turns, including the U.S. and Israel military strikes on Iran. (Read our report, “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.
Brian Levitt is Chief Global Market Strategist and Head of Strategy & Insights at Invesco.
Notes
1. Source: Bloomberg, L.P., Feb. 26, 2026, based on select year-to-date returns including S&P 500 sectors such as energy (+23.16%) and information technology (-3.41%), Korean Stock Exchange (KOSPI) Index (+46.42%), Nikkei 225 Index (+13.41%), and S&P 500 Software Industry GICS Level 3 Index (-17.55%).
2. Source: Bloomberg, L.P., Feb. 26, 2026, based on the year-to-date return of the S&P 500 Software Industry GICS Level 3 Index (-17.55%).
3. Source: CNBC, Nvidia’s blowout earnings report disappoints Wall Street as stock sinks 5%,” Feb. 26, 2026.
4. Source: Bloomberg, L.P., Feb. 26, 2026, based on the earnings growth and price to earnings ratio of the companies in the MSCI All Country World Index ex-US compared to the S&P 500 Index.
5. Source: Bloomberg, L.P., Feb. 26, 2026, based on the year-to-date return of the Nikkei 225 Index (+13.41%).
6. Source: Bloomberg, L.P., Feb. 26, 2026, based on companies in the Nikkei 225 Index, which has returned 16.79% year to date.
7. Source: IPE, “Corporate reform underpins Japan’s record equity run,” Feb. 10, 2026.
8. Source: Bloomberg, L.P. Feb. 26, 2026, based on the US Dollar Index, which measures the value of the US dollar versus a trade-weighted basket of currencies.
9. Source: Bloomberg, L.P., Feb. 26, 2026, based on MSCI Emerging Markets Index and the S&P 500 Index, which returned 3.36% and 0.00% respectively for the four days ended Feb. 26, 2026.
10. Source: Bloomberg, L.P., Feb. 26, 2026, based on the year-to-date return of the Korean Stock Exchange Index (KOSPI) (+46.42%).
11. Source: Korea Ministry of Trade, Industry, and Resources, Jan. 31, 2026.
12. Source: Bloomberg, L.P., based on generic Korean breakeven rates, the difference in yield calculated using the closest nominal government bond and an inflation-linked bond.
Disclaimer
Contents copyright © 2026 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of February 27, 2026. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/LARISA SHPINEVA
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