Global Equity Mid-Year Outlook 2026

Key takeaways

The backdrop for global equities remains supportive in our view, driven by strong earnings growth stemming from increased capital spending from the business sector.
The artificial intelligence (AI) investment cycle remains one of the primary growth drivers of global economic activity in 2026, but it is also now one of the market's most significant sources of dependency risk.
We believe the path forward is still positive, but higher inflation, geopolitical turmoil, and policy uncertainty might lead to more frequent bouts of volatility.
Looking through the second half of 2026, we anticipate a global equity market supported by solid earnings growth, while also facing higher concentration risk and a greater chance that inflation could disrupt returns.

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.

Read more: 2026 Mid-Year Outlook: U.S. Stocks and Economy

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.

Growth is strengthening, but uneven

Global economic activity strengthened in 2026, with the acceleration driven primarily by capital spending from the business sector. This is a shift from the last several years, where consumption and services drove economic activity while manufacturing was weaker.

Manufacturing taking the lead

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.

Regional differences in manufacturing

An earnings boom, but concentrated

Corporate profits have jumped, supported by strong demand, improved margins, and a surge in capital spending tied to technology infrastructure. First quarter earnings for the MSCI All Country World Index (ACWI) grew 24% from the prior year, more than double the average of 11% over the prior four quarters. Bloomberg consensus forward earnings expectations have jumped as well; they imply a 12-month forward earnings growth of 24%. This estimate is up about 14% from the start of the year, reflecting the increase in both actual and expected earnings during the first half of the year. Consensus estimates are based on third-party forecasts that are subject to revision and may not be realized.

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.

Distribution of total earnings growth in the S&P 500

AI investment cycle: A stimulus, but also a dependency risk

One defining feature of the current economic and market cycle is the scale and impact of AI's investment boom. Unlike the dot-com period in the late 1990s, where valuations expanded on little revenue growth, the earnings potential of AI is already showing up in strong 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.

AI dominating business investment

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.

Valuations and expectations: Little margin for error

While strong earnings growth has propelled the global equities market higher and eased some valuation ratios this year, we continue to view general equity valuation as potentially elevated across most major global markets, particularly for technology-related industries that have seen strong earnings growth and market performance.

Valuations at the higher end of their 20-year range in most major markets

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.

Investment implications and risks

The capex-driven growth cycle appears likely to continue and may support earnings and equities through the back half of the year. Its scale has been large enough to offset weakness in other parts of the economy. Recession risk appears to be limited for now, and U.S. consumer spending has been more resilient than sentiment measures would suggest. On balance, this still looks like a supportive backdrop for risk assets and cyclical exposure, however these markets would be vulnerable to a downturn in growth and/or greater inflation pressures that could lead to rising interest rates.

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.

U.S. growth and inflation regime indicator shifting to high growth/high inflation

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.

Macro risks: From "moderation" to "turbulence"

The recent commodity shock tied to the Iran war has pushed global inflation readings higher. Producer price indexes have also moved up quickly, as shown in the chart, which could feed into consumer prices with a lag. Inflation pressure may stay elevated in the near term if Middle East energy supplies remain constrained. Strong economic activity could also add to that pressure.

Production costs have risen lately

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.

Stock and bond prices have moved together recently

What to keep in mind moving forward

In 2026, economic activity has improved. Earnings growth continues to be strong. Capital investment remains robust. Financial conditions are relatively benign. But those strengths are concentrated, and they exist within a shifting structural regime that could produce ongoing geopolitical pressures and increased inflation risks over the longer term.

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.

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