Investment Strategy

Deep dive on U.S. and international equity performance

After significantly underperforming U.S large-cap equities for over a decade, non-U.S. equities of both developed and emerging countries outpaced the S&P 500 Index by 1400 basis points² and 1650 basis points in 2025, respectively.³ Key factors for last year’s reversal included China's January 2025 Deep Seek announcement, which led to a selloff in U.S. technology equities and an accompanying weaker dollar, strengthening global growth, uncertainties around U.S. trade policies, and attractive valuations.

Fast forward to this year, and while major non-U.S. equity markets are once again outpacing U.S. large-cap equities by significant margins, the relative performance of U.S. and international equities is much narrower overall.

Table 1: International indexes outperformed in 2025, but performance has broadened in 2026

U.S.	YTD	2025
S&P 500 Index	0.1%	17.9%
S&P 500 Equal Weight Index	5.7%	11.4%
Russell Midcap Index	5.6%	10.6%
Russell 2000 (Small-Cap) Index	6.8%	12.8%

Non-U.S.	YTD	2025
MSCI EAFE Index	7.5%	31.9%
MSCI Emerging Markets Index	10.9%	34.4%

Source: Bloomberg. Data is as of February 17, 2026. YTD = year-to-date. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

In the U.S., equity markets have broadened out this year with mid- and small-cap stocks as well as the equal-weighted S&P 500 Index significantly outperforming large caps. This has been consistent with our expectations that U.S. economic growth will widen and accelerate into additional areas beyond mega-cap technology stocks aligned with artificial intelligence (AI).⁴ Major international equity markets have outperformed the U.S. for the year through February 17, but the spread is narrower, particularly with developing market equities. (See Table 1.)

2026 sector performance

Chart 1 takes a deeper dive into global equity performance by examining sectors for the major indexes. So far in 2026 (through February 17) performance highlights some key findings, in our view:

1. Cyclical rotation: The transition from technology stocks into more cyclical areas of the market taking place in the U.S. corresponds for the most part to sector performance in non-U.S. equity markets. Energy, Materials, and Industrials have been strong performers in all three major global equity indices, which is consistent with economic growth accelerating worldwide.
2. Emerging-market technology performance: The emerging- market technology sector (based on the MSCI Emerging Markets Information Technology Index) has continued to outperform its U.S. counterpart (based on the S&P 500 Information Technology Index) by a significant margin this year (23% versus -4.9%). We attribute this to several developments that we see:
   • Investor concerns that AI capital expenditures by U.S. mega-technology companies have become excessive, combined with worries about debt financing.
   • Broad sell-off of U.S. software stocks based on fears that AI will replace certain application software sub-industries, resulting in a derating of the industry.
   • More attractive valuations for emerging-market software, with the forward next-twelve-month price-to-earnings multiple for the MSCI Emerging Markets Technology sector at 14 times forward earnings, versus 25x for the S&P 500 Index.

Chart 1. Cyclical sectors have outperformedSources: Bloomberg and Wells Fargo Investment Institute. Data is as of February 17, 2026. U.S. large caps are represented by the S&P 500 Index, developed markets are represented by the MSCI EAFE Index, and emerging markets are represented by the MSCI Emerging Markets Index. Sector performance is represented by the S&P 500, MSCI EAFE, and MSCI Emerging Markets sector indices. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

What it means for investors

This broader strength in the U.S., mirrored in international markets, matches our outlook for an accelerating global economy in 2026. We also believe U.S. equity markets are in the middle of a significant rotation into more cyclical sectors of the market as investors unwind from leveraged positions in technology stocks, metals, and digital assets.

We are constructive on technology equity trends but expect additional investor scrutiny on equipment spending and debt financing, while revenues depend on still-developing AI adoption rates in the economy. As such, we have been expecting that the technology spending trend may at times run too far too fast, and we are staying focused on valuations. During the second half of last year, we trimmed positions to take profits and downgraded the S&P 500 Communication Services and Information Technology sectors to neutral. We also recently upgraded Emerging Market Equities to neutral as its benchmark index (the MSCI Emerging Markets Index) composition has transitioned to a significant weighting in the Technology sector with what we view as more attractive valuations.⁵

We favor overweighting U.S. Large and Mid Cap Equities relative to strategic allocations and taking Developed Market ex-U.S. and Emerging Market Equity allocations to neutral on market pullbacks. We also reiterate our favorable ratings on the S&P 500 Industrials, Financials, and Utilities sectors. We believe the Financials sector seems particularly oversold so far in 2026 and may provide attractive opportunities.

² 100 basis points equals 1%.

³ U.S. large-cap equities represented by the S&P 500 Index; international equities represented by the MSCI EAFE Index (developed markets) and the MSCI Emerging Markets Index (emerging markets).

⁴ For more detail, please see our Institute Alert, “Positive economic surprises drive target revisions,” February 4, 2026.

⁵ For more detail, please see our Institute Alert, “Adjusting portfolio guidance, targets, and allocations,” October 30, 2025.

The role of money market funds in fixed-income portfolios

Many investors hold cash for near-term liquidity needs. However, many investors today are keeping extra cash beyond liquidity needs in money market funds (MMFs), which generally hold ultra-short-term bonds, have short maturities and offer attractive yields. But as interest rates continue to fall from their 2023 and 2024 highs, investors may continue to wonder what role MMFs should play in fixed-income portfolios. We believe that MMFs should not be viewed as a long-term investment, as we believe they are essentially an alternative to holding cash.

With our expectation that the Federal Reserve (Fed) will continue to cut rates in 2026, we recommend that investors examine if excess cash in MMFs is appropriate. MMFs are relatively low risk compared to traditional bonds and easy to access due to their ultra-short-term maturities, but this also means that MMFs move with interest rates and offer little ability to lock in yields at current levels. Those yields should fall as the Fed lowers rates, and Chart 2 shows this tight correlation.

Chart 2. Fed funds rate and ultrashort-term yieldsSources: Bloomberg and Wells Fargo Investment Institute. Data as of February 9, 2026. Money market fund yields are represented by the yield on a three-month Treasury bill. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results.

As MMFs are considered a cash alternative, we believe they should be treated differently from positions with a traditional maturity and risk profile. Rather, we prefer a smaller portfolio role, one that is primarily for portfolio liquidity needs. We believe cash alternatives can still be valuable for emergencies or lifestyle needs for investors but should not be viewed as a potential source of long-term returns.

As investors prioritize sources of higher return, we see opportunities to consider more risk for a potentially higher yield. We see this both by extending maturities to intermediate maturities (in the three-to-seven-year range) and by slightly extending credit risk to investment-grade corporate bonds. We are favorable on both U.S. Intermediate Term Taxable Fixed Income and U.S. Taxable Investment Grade Fixed Income as a result.

Copper taking a breather

Metals of all stripes have seen prices rise sharply and then pull back, and copper is no exception. Copper’s sensitivity to global growth means increased price volatility, especially during times of economic uncertainty. We are undeterred by the recent choppiness and remain favorable on Industrial Metals, given longer-term reasons for durable demand.

Those reasons include a recovery in U.S. housing, a continued bottoming in the Chinese economy, the build-out of AI data centers, and the related increase in power generation needs. U.S. housing should rebound if the Fed cuts interest rates, which should make home ownership more affordable and spur construction. The Trump administration has also increased rhetoric around housing affordability and spurring housing construction.

With respect to China, a focus on supporting the domestic economy, which relies heavily on manufacturing, to offset the headwinds from global trade protectionism should increase demand for industrial metals. Lastly, AI has been a game changer both with respect to the building of data centers and the power needed to run them, both of which require the usage of copper and industrial metals.

Chart 3 shows the Bloomberg Copper Subindex Total Return Index (BCOMHGTR at 1140) is in an uptrend, with the 50-day moving average (1156) now trading above the 200-day moving average (1036). It should find support at the 200-day moving average (1036). The relative strength index (RSI) in the panel below is neither overbought nor oversold at a reading of 44. Investors may want to consider pullbacks toward key support levels to add exposure to copper and industrial metals.

Chart 3. Copper prices have consolidatedSources: Bloomberg and Wells Fargo Investment Institute. Daily data from February 17, 2023 through February 17, 2026. BCOMHGTR = Bloomberg Copper Subindex Total Return. SMAVG (50) = 50-day simple moving average. SMAVG (200) = 200-day simple moving average. RSI = relative strength index. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Private real estate has shown steady gains

The NCREIF Property Index (NPI) reported a 1.1% return for the fourth quarter of 2025, as shown in Chart 4. This marks the sixth positive quarter following a period of declines in 2023 and early 2024. The NPI seeks to measure the change in market value of private real estate properties that operate in the U.S. and are owned by institutional investors, and it aims to offer insight into private real estate market trends.

The latest return was supported by both rental income and stabilizing property valuations. While positive, the result remains below long-term averages observed before the coronavirus pandemic.

Sub-index performance across major property types was largely similar, ranging from 0.8% to 1.6% (see Chart 4). Returns in the retail sub-index improved for the quarter, which was likely supported by limited inventory and scarce new supply.⁶ In contrast, residential returns weakened, reflecting softer demand tied to slower job growth, low household formation, and immigration-related headwinds.⁶

Office and industrial sub-index returns were largely unchanged for the quarter. The office sector has shown signs of stabilization as valuation markdown has eased but continues to work through structural challenges, including low utilization, elevated vacancy rates, and tight financing conditions.6 Industrial property demand has also softened in 2025 amid economic uncertainty, trade concerns, and high valuations.⁶

Overall, the private real estate market appears to be transitioning into a new phase following several years of inflation, rising interest rates, and economic volatility. We believe the future of private real estate hinges on the path of monetary policy and economic growth, which influences cost of capital, valuations, and demand.

Chart 4. The NPI reported consistent gains across property types in the fourth quarter of 2025Sources: NCREIF and Wells Fargo Investment Institute. Data as of December 31, 2025. Q4 = fourth quarter. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

⁶ GreenStreet, “Annual Sector Outlook,” January 25, 2026.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, February 23, 2026. Please see Wells Fargo Investment Institute's Asset Allocation Strategy Report for more detailed, investable ideas in each asset group.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Investing in copper or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Cash alternatives typically offer lower rates of return than longer-term equity or fixed-income securities and provide a level of liquidity and price stability generally not available to these investments. Some examples of cash alternatives include: bank certificates of deposit; bank money market accounts; bankers’ acceptances, federal agency short-term securities, money market mutual funds, Treasury bills, ultra-short bond mutual funds or exchange-traded funds, and variable rate demand notes. Each type of cash alternative has advantages and disadvantages which should be discussed with your financial advisor before investing. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

Bloomberg Copper Subindex Total Return Index is a single commodity subindex of the Bloomberg Commodity Index composed of futures contracts on Copper.

MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia, and the Far East, excluding the U.S. and Canada.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

MSCI Emerging Markets Information Technology Index is designed to capture the large and mid-cap segments across Emerging Markets countries.

Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index.

Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 90% of the total market capitalization of the Russell 3000 Index.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market.

S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500 Index. The index includes the same constituents as the capitalization weighted S&P 500 Index, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.

S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

NCREIF Property Index (NPI) measures the change in market value of U.S. based investment-grade, income producing operating private real estate properties held by institutional investors. The market value is based on appraisal and quarter returns are time-weighted returns, including both income and capital appreciation before investment management fees. The index consists of 12,914 investment-grade, income-producing properties with a market value of $906 billion. and includes property data covering over 100 markets (core-based statistical areas or CBSAs).

NPI provides industrial, residential, office and retail subindexes which represent performance for each of those sectors. For Q4 2025, the market value breakdown by property type is about 18% office, 29% residential, 13% retail, 34% industrial with the remaining 6% consisting of hotel, self-storage, and seniors housing and “other” sectors.

Green Street collects data primarily through proprietary research, verified transaction databases, and digital analytics tools to provide commercial real estate (CRE) intelligence. They gather insights on property-level fundamentals, rent comps, and sales data ($5M+).

Key data collection methods include:

• Proprietary Research & Analysis: Deep analysis of public and private market data by a team of research analysts, including forecasts for operating fundamentals.
• Verified Comps Database: Collection of verified sales and rent comparable data across the U.S., Canada, and Europe.
• Digital & Web Tracking: Green Street uses HubSpot for marketing analytics, collecting data on website visits, downloads, and user interactions.
• Retail/Specialized Data: They gather granular insights on vacancies, tenant mix, and footfall.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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