Global Equity Mid-Year Outlook 2026

Global economic activity has accelerated, with business investment being a key factor. Earnings are rising at a faster pace than last year, supported by a powerful capital expenditure cycle tied to AI and related infrastructure buildout. This combination of improving economic activity and strong earnings growth has historically been bullish for equities, helping to explain the general resilience of markets in the first half of 2026 in the face of geopolitical and inflation risks.

However, the same forces driving equities higher seem to be concentrating risk. Global earnings growth has become increasingly dependent on a relatively small set of companies tied to AI capital spending (capex). AI capex could continue to grow in coming months, but market leadership has narrowed significantly, with a small subset of stocks driving a disproportionate share of performance in the MSCI indexes for both developed and emerging markets.

Inflation has also re-emerged as a source of market risk. While recent pressure has been tied in part to the energy shock from the Middle East, broader geopolitical tensions, protectionist policy shifts, and large fiscal deficits may also contribute to a more inflation-prone environment than investors experienced over the last several decades.
Looking through the second half of 2026, we see an equity market supported by solid earnings growth, but one also facing higher concentration risk and a greater chance that inflation could disrupt returns. Global equities could continue to move higher if growth supersedes inflation pressure, but the shifting environment argues for deliberate diversification and risk management.

While earnings growth across sectors for 2026 has improved, the contribution to aggregate earnings has been narrowly concentrated. A small group of companies tied to AI's innovation cycle, particularly semiconductors and digital platforms, are driving a large percentage of total earnings growth.

Capital spending by hyperscalers, which are large-scale cloud-service providers with vast, global networks of data centers, has risen sharply and is expected to continue to grow along with AI-related investments by the broader business community. This spending is functioning as a macro-level stimulus supporting revenue growth, driving demand across supply chains, and boosting industrial and infrastructure activity.

If returns on AI investment disappoint, market expectations will need to readjust if capital spending slows and financing conditions tighten. The potential impact could extend across the broader markets given the increased concentration and activity.

While higher profitability and structural growth may justify valuations above historical averages, our analysis indicates that market pricing appears to be discounting continued profit margin expansion and above-average earnings growth.

However, when valuations and earnings expectations are both elevated, especially after a long period of outperformance, downside risk may also increase. If current earnings expectations prove too optimistic, markets could reprice quickly. Today, many of the companies with the largest upward revisions to earnings estimates—primarily in the Technology and Communication Services sector—also carry large weights in the S&P 500 and MSCI Emerging Markets Index, which may leave less margin for error in those markets.

At the same time, our macro work suggests markets may be moving into a new phase in which both growth and inflation are running stronger than they were over the last several years.

Historically, global equity returns have been positive in this phase with market leadership typically driven by higher-growth, cyclically oriented sectors. The U.S. and emerging markets have typically outperformed international developed markets in this phase, and our view is that could be the case as long as rising inflation does not upend growth. This remains a key uncertainty due to the conflict in Iran as well as broader geopolitical fragmentation. However, it is important to note that historical patterns are not reliable indicators of future results.

The recent energy shock reinforces our view that inflation may be more volatile than it was during the Great Moderation. That matters for markets. In recent years, stock and bond correlations have turned positive at times, raising questions about how consistently bonds can diversify equity and other risk exposures during periods of market stress.

Equity markets may continue to move higher in this environment, although periods of volatility could become more frequent. The path forward appears increasingly dependent on a narrow set of drivers, which may leave markets more sensitive to disruption. Diversification across regions and sectors remains important.

Investors may want to emphasize earnings quality and durable, earnings-supported themes rather than chase speculative headlines. Concentration risk should also be managed to help avoid overexposure to single themes or narrow leadership groups, particularly if valuations become stretched.

Heather O'Leary, Senior Manager, Equity Research and Strategy, contributed to this report.