Equity markets have spent much of 2026 leaning on a single sturdy crutch: profits. In its August 2026 Equity Insights1, HSBC Asset Management argues that crutch is still holding, but the market is now inspecting it far more closely. "In a market where AI enthusiasm is being tested by delivery, the next phase of equity broadening is likely to be more selective and more volatile," writes Pierin Menzli, Global CIO, Equity. The theme running through the entire report is a shift in what markets reward. As Menzli puts it, "Profits remain an important support, but markets are becoming less willing to reward investment plans without clearer evidence of durable returns."
Wide Adoption, Narrow Engine
The AI cycle remains the central pillar, and it is genuinely spreading. The investment wave has moved beyond hyperscalers and leading chipmakers into memory, data centres, power, cooling and industrial equipment, and the share of S&P 500 companies citing quantifiable AI benefits has jumped from roughly 4% in 2023 to about 25% today. Yet the profit engine remains startlingly concentrated: the top ten contributors in the S&P 500 account for more than half of recent earnings upgrades, data centre revenues drive around 90% of growth at leading AI chip manufacturers, and US hyperscaler capex is expected to exceed US$1 trillion by 2027. "Yet recent volatility shows that the path will not be linear," Menzli cautions. "Investors are testing whether the scale of capital expenditure can translate into recurring adoption revenues, stronger free cash flow and returns that justify current valuations."
The report's sharpest analytical distinction is between lumpy, capex-driven infrastructure revenues and potentially recurring adoption revenues. The valuation picture reinforces the point: reported P/E multiples have compressed as earnings surged, but price-to-cash-earnings and price-to-book ratios now sit near early-2000s levels. The team's conclusion is neither "all in" nor "all out," but participation with discrimination.
Oil Shock Fault Lines
The closure of the Strait of Hormuz introduces a second test. The team's top-down US earnings model suggests even a prolonged six-month disruption would slow or flatten earnings growth into year end rather than collapse it, a resilience rooted in America's AI-heavy earnings mix. Europe is more fragile: with only 2%-3% of upgrades and higher sensitivity to supply-side shocks, downside scenarios point to meaningful pressure as early as Q3. Across Asia, policy choices mediate everything. Benchmark crude is up 50-60%, yet retail fuel prices have risen closer to 15% on average, with India absorbing the shock fiscally while the Philippines and Thailand pass it through. The playbook, in short, gets narrower, not broader.
The EM Case: Cheaper, Broader, Reshaped
The most compelling broadening story remains emerging markets, though not uncritically. Menzli notes that "Korea's sharp correction has shown how quickly concentrated semiconductor exposure and leveraged positioning can amplify market swings, even when reported profits remain strong." Still, the arithmetic is striking: EM equities are up roughly 13% year to date yet have become about 30% cheaper on forward earnings, trade at a 40% forward P/E discount to the S&P 500, and sit at about one third of US price-to-book levels. Meanwhile, a record IPO cycle spanning China, Hong Kong's roughly 500-listing pipeline and fintech unicorns in Africa and Latin America is remaking EM indices, with innovation-driven sectors now nearly 40% of benchmarks versus 10% a decade ago. Since 2020, about US$1.7 trillion has flowed into US equities against roughly US$350 billion into EM, leaving non-US assets structurally under-owned.
The report's closing discipline is worth quoting in spirit: the opportunity lies where earnings are revised higher, where capex creates real demand, where valuations are not discounting perfection, and where structural change is improving the profit base. When the facts change, the positioning should change too.
Five Key Takeaways for Advisors and Investors
- Separate capex revenues from adoption revenues. Recurring adoption income, not infrastructure spending, will determine which AI names retain market support.
- Trust cash-based valuations over reported P/Es. Earnings growth has flattered simple multiples; cash earnings and book-value measures near early-2000s levels argue against an indiscriminate "all-in" stance.
- Treat the oil shock surgically. US earnings can absorb it; Europe and weak pass-through Asian importers cannot, at least not as easily.
- Revisit EM allocations. Decade-wide valuation discounts, structural under-ownership and index transformation strengthen the case for selective, actively managed exposure.
- Broadening is not rotation. This is not US versus the rest of the world. Focus on markets where earnings delivery, real demand, competitive advantage and structural change reinforce one another.
Footnote:
1 Menzli, Pierin, et al. Equity Insights: The Next Phase of Broadening. HSBC Asset Management, Aug. 2026, https://theideafarm.com/wp-content/uploads/2026/08/Equity-Insights-August-2026.pdf.
