We remain constructive on equities into year-end 2026, a view which to date has very much been supported by improving earnings breadth. In the US, the median S&P 500 company is expected to deliver earnings growth of around 16% in 2026, and Europe has experienced its broadest earnings upgrade cycle in three years.
Can earnings continue to justify current valuations, or are markets increasingly vulnerable to a correction?
So far, earnings have continued to justify valuations, since they have remained exceptionally strong, especially in the US, while in Europe they are experiencing one of the strongest upgrade cycles in years. Nevertheless, the market has become increasingly reliant on AI-driven earnings growth. This means that valuations remain supportable but that the margin for error is narrower than it was a year ago, making markets more susceptible to periodic volatility and corrections. We believe that this year the seasonal equity market turbulence so often experienced from September into late October ahead of US midterm elections should be seen as a buying opportunity rather than a reason to retreat.
Where to find equity opportunities for the rest of the year
AI: Spending still carries the cycle, but growth is broadening
Since July, market leadership has definitely broadened beyond AI, but our equity strategists still remain constructive on the structural AI theme. Their preference within the segment is for semiconductors and selected software companies over hardware, which faces slowing growth and higher memory costs.
Communications sector: Reaping the rewards of AI
Our analysts upgraded the communications sector to Overweight in May. Importantly, the sector is highly heterogeneous, with very different subgroups driving performance: internet and digital advertising platforms on the one hand, and legacy telecommunication service providers on the other. This mix offers investors exposure to both structural growth and defensive income characteristics at still-reasonable valuations. Some of the big hyperscalers fall within this sector and we are warming up to them. Accelerating AI monetisation is supporting revenue growth, valuations have become more attractive, and an eventual moderation in capital expenditure growth could improve the free cash flow outlook after reaching a trough in 2027.
Biotechnology and MedTech: Standouts in the healthcare sector
The healthcare sector offers opportunities for investors to diversify beyond AI. We favour biotechnology and medical technology (MedTech), where innovation pipelines and margin profiles appear to be strongest. Many of the companies in these subsectors are also part of our Next Generation Genomics theme, on which our analysts have a constructive stance as they expect developments to remain a key driver of precision medicine. With large pharmaceutical companies facing a substantial patent cliff, the demand for new clinical assets and innovation remains robust. The pipeline of precision medicines continues to expand, and healthcare systems are increasingly embracing personalised approaches to care. As such, our analysts believe that innovation-driven healthcare remains a compelling long-term investment opportunity.
Europe: A more constructive outlook for equities
With earnings upgrades broadening across sectors and new manufacturing orders returning to expansion, things are looking good for European equities. Added to this is an improving macroeconomic background and resilient domestic growth. European banks remain a preferred sector, with our analysts maintaining their Overweight rating thanks to strong earnings momentum, net interest margin expansion, and resilient credit quality. The sector also offers shareholder returns of around 7% through dividends and buybacks.
We currently also favour selected cyclical companies that could benefit from an increase in investment activity, companies that generate a significant share of their revenue in Europe, and stock-specific recovery opportunities. Companies with such features are particularly noticeable in the automotive supplier, construction, materials, and chemicals sectors.
At the index level, we retain a preference for peripheral countries like Italy and Spain, which have outperformed core markets since our analysts upgraded them to Overweight in May. Switzerland remains a core allocation within global equity portfolios, and we remain constructive on the Swiss market given near-record-low relative valuations and attractive diversification benefits.
Asia: Remains in focus, and also home to our preferred emerging markets
Japan is seen as a key beneficiary of accelerating AI investment, with returns broadening on the back of wage increases, fiscal expansion, and corporate reforms. Singapore not only offers defensive exposure – muting AI-related volatility – but also benefits from a strong currency and firm economic growth. We see long-term potential in both China and India. In China, our focus is on areas with strong structural growth; our highest conviction lies in the domestic AI ecosystem, favouring both beneficiaries of technology localisation and semiconductors, with additional opportunities in biotechnology. When it comes to India, our analysts maintain a constructive view on the country’s domestic resilience given the strength of revenue growth and improving foreign investor inflows. Finally, we expect market performance to broaden beyond the technology-heavy markets of South Korea and Taiwan, creating opportunities across a wider range of Asian sectors and companies.
Frequently asked questions
The market appears to be penalising both companies that underinvest in AI and those that overinvest in it. What separates the likely winners from the losers?
The market is increasingly focused on monetisation rather than investment. The winners will be companies that can convert AI spending into revenue growth, higher productivity, and stronger earnings. Scale, proprietary data, and customer relationships are becoming key competitive advantages. On the other hand, companies investing aggressively without a clear path to returns are likely to face growing scrutiny from investors. The next phase of the AI story is likely to be less about who spends the most and more about who monetises AI the most effectively.
Can China’s innovation and AI ambitions reignite investor interest, and where are the best investment opportunities?
Despite ongoing challenges in property and domestic consumption, China’s innovation ecosystem continues to evolve rapidly. We see opportunities particularly in domestic AI champions, software platforms, semiconductor-related names, and technology localisation beneficiaries. Following the recent correction, valuations have become more attractive, and investors have an opportunity to gain exposure to China’s next-generation technology leaders rather than to the traditional economy sectors.