Global equity regional allocation: non-US equities and emerging markets versus developed markets Report Interpretation

Overview

This global equity-strategy report maintains a constructive year-end equity view while shifting the emphasis away from US-led, AI-driven concentration. J.P. Morgan expects stronger activity, broader earnings delivery, a potentially weaker USD and unusually inexpensive, lightly positioned EM equities to favor non-US markets, while recognizing geopolitical escalation, inflation and tighter policy as key threats.

Core views

J.P. Morgan remains bullish on global equities into year-end. It argues that the main support is a robust activity backdrop rather than an absence of risks: global equities have stayed near all-time highs despite geopolitical tension, inflation fears and a bond-market sell-off. The institution highlights a recovery in non-tech activity, including improving global ex-China manufacturing output and US non-tech capex and structures. US ISM manufacturing has reached a four-year high, Eurozone manufacturing PMIs have resumed their uptrend after an Iran-conflict-related dip, and the Eurozone economic-surprise index has risen to multiyear highs. This stronger activity is feeding into healthy Q1 and Q2 earnings seasons, broader sector-level earnings delivery and weekly EPS revisions that have turned positive in all key regions. J.P. Morgan therefore expects further equity upside and fresh highs in the second half. The report does not view higher bond yields or moderate central-bank tightening as sufficient to overturn that constructive case, provided inflation expectations remain anchored. It contrasts the present environment with 2022: then, Atlanta Fed wage growth was above 6% and rising amid supply bottlenecks, ultimately prompting aggressive tightening; now wage growth has trended lower for several quarters and is closer to 4%. The latest payrolls showed robust hiring but the lowest year-on-year hourly-earnings growth since Covid. J.P. Morgan believes much of current inflation pressure is tied to short-term oil-price movements and expects headline CPI in the US and Eurozone to fall sequentially if oil remains around current levels as base effects fade. Term premia have largely normalized, real rates remain within the range of recent years, and the report sees yields as manageable for equity valuations at current levels. It notes, however, that once the US 10-year yield reaches 5.5% or above, higher yields have historically produced materially sharper equity-multiple compression. A central regional call is continued non-US outperformance versus the US. MSCI AC World ex US outperformed the US by more than 15% in USD total-return terms in 2025 and is ahead again this year by 4.3%. J.P. Morgan expects this to persist if market participation broadens into year-end and the Iran conflict does not dramatically re-escalate. Its rationale is a narrowing regional earnings and growth gap: after US earnings beat the rest of the world over the past three years, 2026 earnings growth is expected at 36% year-on-year for MSCI AC World ex US versus 32% for the US. Its economists expect global ex-US real GDP growth of 2.8% this year, compared with 2.1% for the US. The report also sees a less dominant role for AI in second-half equity returns as a catalyst for broader participation. At the recent low, only about 25% of MSCI AC World constituents had outperformed the index over the preceding three months; improved breadth should favor the rest of the world and cyclical sectors. European cyclicals have already outperformed defensives by around 7% year-to-date, while US cyclicals lead defensives by roughly 10%. J.P. Morgan expects technology to perform adequately in absolute terms but not to dominate returns as it did previously. Mag-7 has notably underperformed the overall market this year. The firm considers the prior momentum unwind in technology largely complete, sees the near-term de-risking as potentially overdone, and expects continued earnings delivery to support some rebuilding of positions. Semiconductor stocks are expected to stabilize rather than lead unequivocally, a development that would support the EM trade given EM technology exposure. In Europe, the report is Overweight Mining, Capital Goods and Semiconductors; it expects Mining to benefit from a constructive China impulse and a bearish USD backdrop, Capital Goods from capex and electrification, and Semiconductors from a China/EM upswing. It is Underweight Media and Software, citing continuing AI-related disruption despite the possibility of tactical rebounds after derating. The report also sees a weaker USD as supportive of global and especially non-US equities. The dollar has served as a safe haven during geopolitical escalation, but J.P. Morgan judges it not cheap and believes it could resume depreciating. It views USD positioning as stretched and considers a less-hawkish-than-priced Fed possible as inflation conditions improve. Historically, a weaker dollar has supported equity markets, particularly non-US equities; a weaker dollar and stronger EM currencies are also identified as important drivers of the EM-versus-DM view. J.P. Morgan retains its Overweight EM versus DM call, following its upgrade of EM last year after a prolonged cautious stance. EM was ahead of DM by as much as 20% this year and remains ahead by 11% on a total-return basis, close to the 12.8% outperformance recorded in 2025; cumulative outperformance since the start of 2025 is approximately 17% in USD. The institution says the case remains intact despite Iran-related disruption and memory-trade volatility because EM activity and earnings indicators are improving. Its EM-versus-DM forecast-revision index is trending higher, weekly MSCI EM EPS revisions have turned positive, and projected EM earnings growth is 72% year-on-year in 2026 and 23% in 2027. Positioning remains low: EM represents about 11% of MSCI ACWI market capitalization but only around 6% of global assets under management. EM equity flows have recently picked up after Q2 outflows; net inflows totaled $29.2bn in 2025, the highest since 2021, and around $75bn has already been recorded in 2026. Valuation is another major EM support. J.P. Morgan places EM at approximately 10x forward P/E versus about 18x for DM, a record 45% discount that remains unusually wide even after cycle adjustment and inflation adjustment. The report therefore sees scope for allocation normalization, stronger flows and a stabilizing semiconductor complex to reinforce EM relative returns. It acknowledges near-term volatility risks but states that its EM strategists see a favorable medium-term path for Asian equities, driven by AI capex and adoption, security and resilience spending, and a balanced global macro environment. Korean corporate buybacks, which the report says are poised to reach unprecedented levels, are cited as an additional regional support. The portfolio recommendations reflect this view. J.P. Morgan allocates 65% to equities against a 60% benchmark, 30% to bonds against a 30% benchmark, and 5% to cash against a 10% benchmark. Within global regional equities, it allocates 14% to EM against a 12.1% benchmark and 11% to the Eurozone against an 8.7% benchmark, while allocating 86% to DM against an 87.9% benchmark. The US, Japan and UK are Neutral. It characterizes US positioning as crowded, valuations as full and AI commoditization as a relative risk; it sees Japan’s fundamentals, reforms, buybacks and wage gains as supportive but valuations as fuller after a strong rally, and regards the UK as cheap and defensive but lacking near-term growth catalysts.

Analysis framework

J.P. Morgan links macro activity indicators, inflation and wage trends, bond yields, EPS revisions, regional earnings forecasts, market breadth, positioning, fund flows, FX and relative valuation measures to form its allocation views. It compares current conditions with 2022, evaluates relative performance across regional equity indices, and tests its regional thesis through earnings-growth differentials, GDP forecasts, forward P/E discounts and flow data.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Forward P/E relative valuation

  The report compares EM at about 10x forward P/E with DM at roughly 18x, describing the resulting 45% discount as a record low and a key support for EM relative performance.

• Industry AnalysisVolume-price decomposition

  Earnings breadth and cyclical-versus-defensive performance analysis

  The report assesses whether improving activity is broadening earnings delivery beyond technology by tracking EPS revisions, sector performance and cyclical sectors relative to defensives.

• Event-Driven and Behavioral FinanceFund-Flow and Positioning Analysis

  Positioning and fund-flow analysis

  J.P. Morgan uses EM's low allocation relative to its market capitalization and the recovery in EM fund flows to argue that reallocation demand could support the region.

Asset mapping & comparison

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

• Global equities

  Overweight allocation at 65% versus a 60% benchmark

  Strengths

  Improving activity indicators, broadening earnings delivery and positive EPS revisions across regions.

  Weaknesses

  Geopolitical risks, inflation fears and higher bond yields remain headwinds.

  Comparison

  Equities are preferred to cash; bonds are held Neutral.

  Risks

  A material geopolitical escalation, de-anchored inflation expectations or restrictive yield levels could weaken the outlook.

• Emerging market equities

  Overweight versus developed markets

  Strengths

  Improving forecast revisions, 72% projected 2026 EPS growth, low positioning, improving flows and a record relative valuation discount.

  Weaknesses

  Near-term volatility from the Iran conflict and memory-trade disruption.

  Comparison

  EM trades at about 10x forward P/E versus roughly 18x for DM and has outperformed DM by 11% year-to-date.

  Risks

  A stronger USD, weaker EM FX or renewed technology volatility could challenge relative returns.

• Eurozone equities

  Overweight

  Strengths

  Improving credit impulse, stronger economic-surprise data and an expected earnings rebound.

  Weaknesses

  The outlook depends on the conflict not extending through the second half.

  Comparison

  Allocated 11.0% versus an 8.7% MSCI benchmark weight.

  Risks

  Further geopolitical escalation could undermine the expected earnings recovery.

• Developed market equities

  Underweight versus EM

  Weaknesses

  Relative valuations are much higher than EM and the report sees less favorable relative earnings and positioning dynamics.

  Comparison

  Allocated 86.0% versus an 87.9% MSCI benchmark weight.

• Mining, Capital Goods and Semiconductors

  Overweight European sector calls

  Strengths

  Mining is supported by a constructive China impulse and bearish USD backdrop; Capital Goods by capex and electrification; Semiconductors by expected stabilization and a China/EM upswing.

  Weaknesses

  Semiconductors are not expected to dominate second-half returns as AI did previously.

  Comparison

  Preferred over Underweight Media and Software.

  Risks

  China activity is the key wildcard for Mining; technology momentum and earnings delivery remain important for Semiconductors.

Key data

• Global equity performance15% YTD total return in USDJ.P. Morgan's stated performance for global equities.
• Non-US versus US performance4.3% YTD outperformanceMSCI AC World ex US minus MSCI US in USD total-return terms; non-US outperformed by 15.4% in 2025.
• 2026 earnings growth36% for MSCI AC World ex US vs 32% for the USExpected year-on-year EPS growth.
• Global ex-US versus US GDP growth2.8% vs 2.1%J.P. Morgan economists' forecast for this year.
• EM versus DM performance11.0% YTD; approximately 17% cumulatively since the start of 2025USD total-return outperformance cited by the report.
• EM earnings growth72% in 2026 and 23% in 2027Year-on-year growth projections cited for MSCI EM.
• EM valuation10x forward P/E vs approximately 18x for DMA 45% discount, described as significantly wider than the historical median.
• EM allocation and flows11% of MSCI ACWI market capitalization vs around 6% of global AUM; $29.2bn inflows in 2025 and around $75bn in 2026Evidence of structural underweight positioning and improving flows.

Impact & implications

The report's allocation message is to remain constructive on equities while emphasizing broader, non-US and cyclical participation rather than relying on AI-led market concentration. It favors EM and the Eurozone relative to DM, sees a stabilizing semiconductor sector as helpful to EM, and considers a weaker USD and improving earnings breadth important supports.

Risks

• A dramatic re-escalation of the Iran conflict could disrupt the non-US and broader equity-outperformance case.
• Inflation expectations becoming de-anchored could undermine the constructive equity view.
• Fed rate hikes amid worsening inflation and escalating geopolitical uncertainty are identified as a downside scenario.
• US 10-year yields at 5.5% or above could create materially more restrictive valuation pressure through sharper multiple compression.
• Near-term headwinds could cause volatility in the EM trade, including memory-sector volatility and USD or EM-FX moves.

What to watch

• Whether global activity indicators, including US ISM and Eurozone manufacturing PMIs, continue to strengthen.
• Weekly EPS revisions and whether earnings delivery continues to broaden beyond technology.
• Inflation expectations, wage growth, oil-price effects and the extent of central-bank tightening.
• US 10-year bond yields, particularly whether they approach or exceed 5.5%.
• Developments in the Iran conflict and their effect on oil, risk appetite and regional performance.
• USD direction, EM currency strength, EM equity flows and investor allocation toward EM.
• Whether semiconductor earnings stabilize after the momentum unwind.