Remain Bullish on Global Equities, with Cyclicals and High-Beta Assets Poised to Regain Leadership

Overview

The report maintains a positive view on global equities, expecting major equity indices to reach new highs and continue rising in the second half of 2026. The core rationale is that corporate earnings remain strong, market positioning is not overly crowded, market breadth is beginning to recover, and cooling inflation and labor markets may reduce the need for further central bank tightening. At the style level, the report believes the short-term rebound in low-volatility sectors has ended, and cyclicals and high-beta assets will regain leadership.

Core views

First, risks such as geopolitics, inflation, concentration, and bond market sell-offs have not yet undermined the earnings support for equity markets, and global equities still have upside. Second, the rally will broaden from a handful of large technology stocks to a wider range of stocks, a view reinforced by the weakening relative earnings advantage of the Mag-7. Third, easing inflation and wage growth, together with weak employment confidence, may bring dovish policy surprises and support risk assets by lowering yields and the dollar. Fourth, cyclicals have stronger earnings growth and macro tailwinds, making banks, mining, industrials, consumer discretionary, and semiconductors more attractive. Fifth, emerging markets and the Eurozone benefit from dollar weakness, improving fund flows, better-than-expected economic data, and upward earnings revisions.

Analysis framework

The report uses a top-down asset allocation framework incorporating global and regional equity index performance, investor positioning and fund flows, market breadth, style factors, earnings growth and revisions, inflation and employment indicators, interest rates and dollar trends, and relative valuations across sectors and regions. It also combines technical indicators to identify tactical recovery opportunities in high-beta assets such as semiconductors.

Methodology notes

• Macro AnalysisGrowth-Inflation-Policy Framework

  Assess equity risk appetite based on the interaction between growth, inflation, and central bank policy.

  The report compares the current environment with 2022 and believes that inflation, wage, and oil price pressures are easing, while long-term inflation expectations remain controlled, so central banks do not need to implement aggressive tightening similar to 2022.

• Earnings AnalysisEarnings Growth and Earnings Revisions

  Evaluate market fundamentals through earnings growth, the share of companies beating expectations, and the direction of analyst revisions.

  Second-quarter earnings in the United States and Europe were strong, Eurozone earnings revisions continue to improve, and the forward earnings growth gap between cyclicals and defensives supports style rotation.

• Market StructureMarket Breadth and Rotation Analysis

  Observe the proportion of rising stocks and changes in leading sectors to judge whether the rally is moving from concentration to broadening.

  Global market breadth has recovered from extreme lows, and the relative earnings advantage of the Mag-7 has weakened, indicating that marginal capital may shift from existing leaders to laggard stocks and cyclical sectors.

• Flows and PositioningPositioning and Fund Flow Analysis

  Assess market vulnerability and incremental buying capacity based on positioning crowding and regional fund flows.

  Global equity positioning is not yet extreme, and although European fund flows have recovered, they remain low from a multi-year perspective, so the market faces limited mechanical deleveraging risk.

• Style AllocationCyclicals Versus Defensives

  Use earnings, economic activity, the yield curve, and exchange rates to judge the relative performance of high-beta and low-volatility styles.

  Improving PMI, ISM, and economic surprise indices, together with a steepening yield curve and potential dollar weakness, give cyclicals an advantage over low-volatility defensives.

• Technical AnalysisMomentum, Relative Strength, and Moving Averages

  Identify tactical entry points by combining drawdown magnitude, relative strength indicators, and moving averages.

  The momentum factor, SOX, and KOSPI have experienced significant drawdowns, and the semiconductor index is close to oversold territory. With earnings trends not deteriorating, the de-risking process has provided a tactical opportunity to add exposure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global equities

  Bullish

  Strengths

  Strong earnings growth, non-extreme positioning, improving market breadth, and strong resilience to geopolitical shocks.

  Weaknesses

  Major indices are close to historical highs and still face issues of concentration, valuation, and rising volatility.

  Comparison

  Compared with bonds and cash, if inflation continues to ease and policy no longer tightens, the earnings support for equities is more attractive.

  Risks

  Renewed acceleration in inflation, larger-than-expected central bank rate hikes, geopolitical escalation, or a sharp rise in bond yields.

• Cyclicals and high-beta stocks

  Key bullish view

  Strengths

  Leading earnings growth, improving economic activity indicators, a steepening yield curve, and dollar weakness all provide tailwinds.

  Weaknesses

  More sensitive to changes in economic growth and risk appetite, with short-term volatility typically higher than defensives.

  Comparison

  Expected to continue outperforming low-volatility and defensive stocks in the second half of 2026.

  Risks

  Renewed deterioration in PMI, recession, credit contraction, or an unexpected hawkish policy shift.

• Low-volatility and defensive stocks

  Relatively cautious

  Strengths

  Have some defensive value during periods of market stress and slowing growth.

  Weaknesses

  The recent rebound has weakened, and relative momentum in healthcare, consumer staples, and utilities is declining.

  Comparison

  Earnings growth lags significantly behind cyclicals, and the report believes they are unlikely to lead sustainably in the second half.

  Risks

  If the macro environment improves and risk appetite rises, they may continue to underperform high-beta assets.

• Emerging market equities

  Overweight

  Strengths

  Low valuations, under-owned positioning, accelerating fund flows, and benefits from dollar weakness and reduced China-related trade headwinds.

  Weaknesses

  Sensitive to changes in the dollar, global liquidity, and Chinese economic activity.

  Comparison

  Offer greater currency and valuation recovery potential relative to developed markets.

  Risks

  Renewed dollar strength, weaker-than-expected Chinese growth, or a sharp decline in global risk appetite.

• Eurozone equities

  Overweight

  Strengths

  Economic surprise indices have risen to multi-year highs, manufacturing sentiment and earnings revisions are improving, and the credit impulse is strengthening.

  Weaknesses

  Still affected by geopolitics, energy prices, and changes in external demand.

  Comparison

  Earnings revisions have risen above those in the United States, and major European indices still have some target upside.

  Risks

  Renewed weakening in European growth, an energy shock, or greater-than-expected European Central Bank tightening.

• Semiconductors

  Overweight and positive on tactical recovery

  Strengths

  Earnings momentum, artificial intelligence capex, and memory prices remain supportive, while short-term forced de-risking has created an entry point.

  Weaknesses

  The trade was previously crowded and volatile, and technicals have experienced a significant breakdown and drawdown.

  Comparison

  Compared with other technology sectors, semiconductors have clearer earnings and supply-demand support, but the report does not believe technology will lead broadly as it did in the previous summer.

  Risks

  Cooling artificial intelligence investment, weaker-than-expected memory demand, valuation compression, or continued positioning deleveraging.

• U.S. dollar

  Moderately bearish

  Strengths

  Safe-haven characteristics and interest rate advantages may still provide support during risk events.

  Weaknesses

  Net long positioning is elevated, while the potential dovish shift by central banks and policy intervention tendencies both increase the risk of dollar weakness.

  Comparison

  Dollar weakness is generally more favorable for global equities, especially emerging markets and international equities.

  Risks

  A rebound in U.S. inflation, renewed increases in interest rates, or a sharp rise in safe-haven demand could drive a dollar rebound.

Key data

• MSCI AC World year-to-date returnAbout 14%Calculated on a total return basis, it has fully recovered the drawdown from March to April.
• Global market breadthRecovered from about 25% to nearly 40%The indicator is the proportion of constituents outperforming MSCI AC World over the past three months.
• Maximum drawdown of the momentum factorDown about 20% from the May highIndicates that crowded momentum trades have undergone significant de-risking.
• Recent drawdown in the SOX indexClose to 30%The 14-day relative strength indicator is near oversold territory and the index once fell below its 100-day moving average.
• Recent annualized growth rate of U.S. core PCE pricesBelow 3%Recent month-on-month data indicate that core inflation pressure is easing.
• U.S. 5-year 5-year forward inflation expectationsDid not break above 2.60%The volatility range during the energy shock triggered by the conflict was about 25 basis points, and long-term expectations remain relatively stable.
• University of Michigan 5- to 10-year inflation expectations3.3%Long-term consumer inflation expectations remain under control.
• Oil price changeDown about 30%Expected to reduce headline inflation in the United States and the Eurozone through base effects.
• Expected S&P 500 second-quarter earnings growthAbout 26%Average company earnings exceeded expectations by about 11%.
• Share of S&P 500 companies beating earnings expectations88%Above the average of about 76% in a typical quarter.
• Year-to-date relative performance of European cyclicalsAhead of defensives by about 10%Cyclical leadership remains even after excluding technology and artificial intelligence-related exposure.
• Year-to-date relative performance of U.S. cyclicalsAhead of defensives by about 12%Shows that cyclical leadership is not driven solely by a narrow artificial intelligence trade.
• 2026 forward earnings growth for European cyclicalsAbout 25%Defensives are expected to achieve only mid-single-digit growth over the same period.
• Implied upside to targets for major European indicesMSCI Eurozone 7%; MSCI Europe 5%; EURO STOXX 50 5%; STOXX 600 3%; FTSE 100 1%Based on the December 2026 target levels listed in the report and index levels at the time.

Impact & implications

In asset allocation, investors should maintain equity risk exposure and shift from a single group of large technology leaders toward broader cyclical and high-beta opportunities. Regionally, the report prefers emerging markets and the Eurozone; by sector, it highlights banks, mining, capital goods, industrials, consumer discretionary, and semiconductors. If inflation continues to ease, central banks turn dovish, and the dollar weakens, equity valuations and the relative performance of international markets may both benefit. Low-volatility and defensive sectors are better suited as short-term hedges rather than sustained leaders in the second half.

Risks

• Inflation reaccelerates and forces the Federal Reserve, the European Central Bank, or the Bank of England to take more aggressive rate-hiking action.
• Geopolitical conflicts escalate and develop into sustained energy, trade, or supply chain shocks.
• The bond market sells off sharply again, with rising real yields compressing equity valuations.
• Corporate earnings fail to sustain their current strong performance, especially if cyclicals' earnings expectations are revised down.
• Improvements in market breadth stall, and indices again become dependent on a handful of mega-cap technology stocks.
• The de-risking process in semiconductors and momentum trades has not yet ended, causing high-beta assets to continue falling.
• The dollar unexpectedly strengthens, weakening the relative performance of emerging markets and international equities.
• The labor market deteriorates by more than a mild cooling, shifting the market from dovish expectations to recession concerns.

What to watch

• Whether U.S. core inflation, wage growth, and oil price changes continue to support a decline in headline inflation.
• Whether job growth, unemployment, hiring plans, and job-search confidence show mild cooling rather than recession-like deterioration.
• Whether policy expectations for the Federal Reserve, the European Central Bank, and the Bank of England shift from rate hikes to pauses or a more dovish stance.
• Changes in the dollar index, U.S. two-year yields, and the slope of the yield curve.
• Whether global market breadth can continue to break above the current level of nearly 40%.
• Whether Eurozone manufacturing sentiment, economic surprise indices, and earnings revisions can continue to improve.
• Whether the earnings growth gap and price trend of cyclicals relative to defensives continue.
• Whether SOX, KOSPI, and memory prices can confirm a tactical bottom in semiconductors.
• Subsequent earnings beat ratios and management guidance for S&P 500 and Stoxx 600 companies.
• Whether fund inflows into Europe and emerging markets shift from short-term recovery to sustained increased allocation.