"At this stage, we would view bouts of AI-related market trepidation as a pause that refreshes."
— Carrie King, Global CIO, BlackRock Fundamental Equities
Introduction: Three Years Into the AI Market Driver
BlackRock’s Equity Market Outlook for Q1 2026 is not merely a projection—it’s a pulse check on how equity markets are being reconfigured by AI-driven spending cycles, global macro uncertainty, and an underappreciated rise in international equity outperformance. The forward-looking document, anchored by thought leadership from BlackRock's fundamental and systematic equity teams, delivers a clean synthesis of themes that continue to shape market behavior going into the new year.
From reflections on the ongoing AI capex cycle to detailed breakdowns of international market dynamics, the report presents an increasingly nuanced equity environment—one that demands adaptability, precise positioning, and less reliance on legacy narratives.
1. AI CAPEX: Bubble or Backbone?
"AI is an innovation with transformative potential unlike any before."
— BlackRock Fundamental Equities Team
The report opens with a decisive statement: equity markets are poised to log a third straight year of double-digit returns—a statistic that would appear exuberant were it not tempered by the cyclical hesitations of macro-policy uncertainty, tariff resets, and geopolitical tremors.
But one engine stands out: AI.
BlackRock presents compelling data on AI capex investments, forecasting a $395B spend in 2025 by U.S. hyperscalers—a 150% increase from 2022, with even larger outlays expected in 2026. Far from being a speculative frenzy, BlackRock asserts this is a rational response to transformative potential.
They offer a pointed contrast with the dot-com era: while tech valuations were bloated in 2000, today’s market leaders are profitable, and their earnings—not multiple expansions—are driving returns. In fact, “the median valuation [in 2000] was nearly 85% higher than now” among top tech names.
The thematic takeaway? We are witnessing not a bubble, but the maturing phase of an innovation cycle.
2. AI Laggards & Dispersion: A Systematic Pivot
"Skilled stock selection extends beyond the most visible, first-order effects."
— Jeff Shen & Linus Franngard, BlackRock Systematic Active Equities
As attention narrows toward mega-cap AI leaders, BlackRock’s systematic team points to increasing dispersion beneath the surface, especially among so-called “AI laggards.” A telling analysis of 2025’s market behavior reveals how AI underweights—not just overweights—can move portfolios.
Their long–short thematic baskets illustrate this vividly:
- Basket A, short diversified equities, outperformed.
- Basket B, short the S&P 500, was flat.
- Basket C, short “AI catch-up” names (laggards that rallied on new partnerships), underperformed as these firms rebounded.
“The stocks an investor is underweight can still have a meaningful impact on overall performance,” Shen and Franngard argue.
Key implication: Passive exposure won’t cut it. Theme navigation now requires precision.
3. The International Turn: Why Global Markets Matter Again
"Europe, Japan and EMs show promising prospects in 2026—and, crucially, aren’t reliant on AI momentum."
— Helen Jewell, International CIO, BlackRock Fundamental Equities
While U.S. investors obsessed over hyperscaler capex, international equities quietly outperformed in 2025. South Korea (+70%) and Spain (+50%) handily beat the U.S. (+17%), which ranked 20th globally.
BlackRock offers six regional theses—each rooted in earnings trends, monetary policy, and geopolitical alignment:
🇪🇺 Europe
- Banks: Resilient net interest margins, even amid ECB cuts.
- Aerospace & Defense: A structural play on long-cycle NATO/EU defense spending.
- Industrial Rebound: Fueled by fiscal stimulus (e.g., Germany’s €500B injection) and rising loan growth.
🌏 Emerging Markets (EM)
- Macro tailwinds: 125 global rate cuts in 2025, especially in EM economies.
- FX & Commodities: A weaker dollar and inflation moderation boost EM performance.
- Neutral Hubs: Countries like UAE, Mexico, and South Korea are benefitting from global supply chain realignments.
🇯🇵 Japan
- Inflation returns, finally eroding cash hoarding and spurring investment.
- Corporate reform: Buybacks, restructurings, and higher ROEs are attracting global capital.
- Structural real estate plays: Inflation-linked rent growth is boosting margins.
Crucially, these regional stories do not rely on AI tailwinds. This makes them powerful diversification plays.
4. Tactical Insights for Advisors & Investors
Key Takeaways:
On AI Exposure:
- Avoid broad AI themes; focus on "picks and shovels" (e.g., semis, networking, equipment) and niche enablers (like optical networking).
- Active management is essential—dispersion is high, and catch-up names are volatile.
On International Allocation:
- Don't underestimate global markets. U.S. exceptionalism is weakening.
- Japan and Europe are in early innings of reflation, while EMs benefit from the Fed's pivot and weaker USD.
On Portfolio Construction:
- Mind your underweights as much as your overweights.
- Use pair trade logic and thematic baskets as risk tools, even in long-only portfolios.
On Risk:
- Volatility is opportunity—“pullbacks” should be viewed as recalibration moments, not market breakdowns.
Conclusion: Innovation Meets Dispersion
BlackRock’s Q1 2026 Equity Outlook is not a technocratic forecast—it’s a tactical lens for navigating a market where innovation is no longer linear, and geography matters again. The intelligence revolution powered by AI is maturing, and with it, investor expectations must evolve.
Markets are no longer just asking, who’s building the future? They’re now asking, who’s delivering today—and who’s quietly catching up tomorrow?
Takeaways for Advisors
- AI is no longer hype—it’s a capex reality. But don’t ignore laggards.
- Thematic stock selection now trumps sector rotation.
- International equities are under-owned and underappreciated.
- Use volatility tactically; don’t fear AI skepticism—embrace it.
- A multi-regional, actively managed approach will define alpha in 2026.
Footnote:
1 BlackRock. Equity Market Outlook: Q1 2026. BlackRock, Dec. 2025. PDF.
