Global Equity Mid-Year Outlook 2026

Looking out through the second half of 2026, global equity markets are likely to continue to be influenced by major secular themes including AI innovation, geopolitical turmoil, and policy uncertainty, which we expect will further influence economic growth and inflation.

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.

The United States has so far posted stronger growth in 2026 than it did last year, supported by resilient consumer demand and a larger capital investment, particularly in AI infrastructure. Parts of Asia and emerging markets (EM) have also benefited from stronger global manufacturing activity and AI-related investment. However, Europe is generating less domestic growth and appears more exposed to the macroeconomic effects of the recent energy shock. In short, global growth has improved, but that improvement is inconsistent across markets. The growth may, however, still support equities in the second half of the year, but its narrower nature likely leaves markets more reliant on a limited set of regions, sectors, and themes.

This investment cycle is also increasing dependency risk for markets. Current consensus earnings estimates have moved up sharply and now point to strong aggregate growth through 2027. At the same time, related investment flows and financing activity have strengthened. Together, these trends suggest that financial markets have become more tied to the broader AI cycle.

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.

From our perspective, elevated valuations in aggregate don't present an imminent risk on near-term returns. But they do suggest a drag on returns over the medium to long term.

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.

A transition to this phase has important takeaways. Most broadly, markets can shift from a growth-dominated focus to one driven by the interaction between growth and inflation. This interaction is more complex as incremental strength in either category can push yields higher and provoke central banks to raise rates, both of which raise the cost of borrowing and can induce economic slowing.

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.

More broadly, we see recent global conflicts and related inflation pressures not as isolated events but part of a broader structural shift to a more turbulent regime of increased geopolitical fragmentation resulting in rising protectionist policies, supply chain realignment, and an increase in both geopolitical tensions and policy unpredictability. Our colleague Liz Ann Sonders has referred to this new regime as "The Temperamental Era" which is taking over from the "Great Moderation" era that saw inflation and interest rates undergo a persistent, relatively stable decline from the 1980s into the 2010s. In addition to increased geopolitical tensions, the Temperamental Era may see a higher degree of cyclical volatility and a higher level of inflation and interest rates.

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.