The opening months of 2026 have been anything but quiet. Geopolitical turbulence, surging energy prices, and a dramatic rotation in global equity leadership have forced investors to confront a landscape that looks materially different from the one that dominated the post-pandemic bull run. Schroders' March 2026 Equity Lens1 — a sweeping, data-dense survey of global equity markets — doesn't shy away from the complexity. What emerges from its pages is a nuanced, historically grounded argument for diversification, discipline, and a willingness to look beyond the obvious.
Geopolitics and the Stagflation Shadow
Schroders opens with a question that will be on every advisor's lips right now: does geopolitical risk automatically translate into market losses? Their answer, drawn from analysis of eight major events spanning the Gulf War through to the Israel-Iran conflict of 2025, is a firm no. Markets have historically absorbed geopolitical shocks with remarkable resilience, though outcomes vary widely depending on the nature and duration of the event.
More pressing, in Schroders' view, is the secondary consequence: a soaring oil price raising the spectre of stagflation. Examining nearly a century of US equity data from 1926 to 2025, they find that stagflation — defined as above-average inflation combined with below-average growth — is genuinely the most challenging environment for equities. And yet, even then, stocks have historically roughly kept pace with inflation on average, and more often than not beaten cash. That is not a ringing endorsement, but it is an important anchor against panic.
The commodity vulnerability picture is not uniform across geographies. Schroders' analysis of net commodity export positions makes clear that European and Asian economies, as net importers, face the sharpest headwinds from rising energy prices. The United States, (and Canada) now significant energy producer in their own right, are considerably better insulated. This asymmetry matters enormously for portfolio positioning.
Who Is Actually Winning in 2026?
The regional performance data through to March 10 delivers one of the presentation's most striking findings. Emerging markets, Japan, and the UK were each up between 6% and 7% in US dollar terms year-to-date. The US, by contrast, was down 1%. This is not a rounding error — it represents a meaningful shift in the architecture of global equity returns.
Schroders attributes EM's outperformance primarily to earnings upgrades rather than valuation re-rating or currency tailwinds, which makes it structurally more credible. The breadth of outperformance is also widening: the proportion of countries and individual stocks beating the broader market has increased markedly in developed markets, a sign of healthier, more sustainable market dynamics. The notable exception is EM, where performance remains concentrated in a handful of mega-caps — a warning flag for index-heavy EM allocations.
The UK's defensive sector composition — heavily weighted toward energy, consumer staples, healthcare, and utilities — has proven well-suited to the current environment. Schroders' historical analysis of sector performance across five major oil supply shocks shows these are precisely the areas that have held up best. Japan and EM, by contrast, carry challenging sector exposures, with low defensive weightings that leave them more vulnerable in a commodity price shock scenario.
Valuations: Expensive Everywhere, But Not Equally So
The valuation section of the Equity Lens report is bracing. Across virtually every metric — CAPE, forward P/E, trailing P/E, price-to-book, and dividend yield — global markets remain above their 20-year medians. The US is the most stretched, with its CAPE ratio sitting 49% above its long-term median and price-to-book an extraordinary 84% above. Even after March's selloff, these are not cheap markets.
Non-US markets tell a more varied story. Europe ex-UK and Japan trade at more modest premiums. Within EM, the Philippines, Indonesia, Malaysia, and Mexico screen as among the cheapest on combined valuation metrics, while Taiwan and Korea are the most expensive. For advisors constructing globally diversified portfolios, this dispersion creates genuine opportunity — but requires active navigation rather than passive exposure.
Small caps deserve particular attention. Schroders finds that US and international small caps are not meaningfully extended versus their own histories, and small caps are cheap relative to large caps by forward P/E on both a US and ex-US basis. This is a valuation setup that has historically preceded periods of small cap outperformance.
Sectors, Styles, and the AI Question
One of the most pointed arguments in the presentation concerns value equities as a hedge against AI-related risk. Schroders' analysis shows that pure value strategies have maintained a low correlation with semiconductor stocks — their proxy for AI exposure — and have delivered meaningfully better outcomes during quarters when semis sell off sharply. The median quarterly return for value in those periods is approximately flat; for semiconductors, it is deeply negative.
The catch: most passive value approaches are ill-equipped to deliver this protection. Schroders illustrates that the largest holdings across the major value indices — MSCI USA Value, Russell 1000 Value, and others — include Apple, Microsoft, Amazon, Alphabet, and Meta. These are not AI hedges. They are AI exposures dressed in value clothing. Active, genuinely value-oriented strategies are required to capture the diversification benefit.
In style terms, momentum has been the standout performer over the past year, up over 20% on a long-short basis. Value has also performed well, returning 10% over 12 months. Quality and low volatility have lagged significantly, with quality having underperformed MSCI EAFE by 19% over three years — one of its worst recorded drawdowns.
The Long Game: What History Actually Says
Schroders closes its thematic section with a reminder that markets are, by their nature, uncomfortable. On average, the MSCI World falls 15% at some point during each calendar year, and rises 23%. Drawdowns of more than 10% occur in more years than not; 20% falls arrive roughly once every four years.
The data on staying invested is unambiguous. A portfolio that moved to cash every time the VIX exceeded its long-run average would have grown $100 to $825 since 1990. A fully invested portfolio would have grown the same $100 to $3,941. Jumping ship when markets feel most frightening has been one of the most reliably wealth-destroying behaviours in investment history.
Over the very long run — back to 1926 — US equities have delivered real returns of 2.8% per annum over the past 20 years, rising to 8.5% over 50 years. Bonds and cash have lagged significantly across every horizon. The hierarchy holds: equities beat bonds, bonds beat cash, and time in the market beats timing the market.
Key Takeaways for Advisors and Investors
Geographic diversification is earning its keep. Non-US markets are outperforming materially in 2026, and the valuation gap between the US and the rest of the world, while narrowed, remains historically wide. A home-country or US-centric bias carries real opportunity cost right now.
The UK and value-oriented markets deserve a fresh look. Defensive sector composition and genuine value characteristics have become performance drivers, not consolation prizes. Advisors should revisit allocations that were trimmed during the growth-dominated years.
Passive value is not the same as real value. Most value index funds carry significant tech and AI exposure. Investors seeking true diversification away from AI risk need active strategies with genuine value discipline.
Small caps offer a rare valuation entry point. With small cap valuations unextended relative to history and cheap versus large caps, the setup for a medium-term allocation is more compelling than it has been in years.
Stay invested through the noise. The volatility ahead — whether from geopolitics, energy prices, or earnings disappointments — will feel acute. History is unambiguous that the cost of exiting markets during periods of fear vastly exceeds the cost of enduring them.
Footnote:
1 Schroders. Schroders Equity Lens. Mar. 2026, www.schroders.com. Marketing material for Professional Clients only.
