Maintain Bullish View on Global Equities; Cyclicals and High-Beta Assets Expected to Regain Leadership in the Second Half

Overview

The report argues that global equities have shown strong resilience despite shocks from geopolitics, inflation concerns, market concentration, the direction of the cycle, and bond market sell-offs. MSCI AC World has delivered a year-to-date total return of about 14%, and each drawdown caused by geopolitical shocks has become progressively smaller. Solid earnings support, investor positioning far from euphoric levels, and a rebound in market breadth form the basis for maintaining a bullish view on equities in the second half of 2026.

Core views

The core view is that equities still have upside, but the leadership structure will shift back from low-volatility defensive sectors to cyclicals and high-beta assets. Second-quarter corporate earnings in the United States and Europe were clearly better than expected, and Mag-7 earnings growth excluding one-off factors was slightly below that of the rest of the S&P 500 constituents for the first time since 2022, reinforcing the market-broadening logic. Inflation is easing, labor market confidence is weak, central banks do not need to turn much more hawkish, and dovish surprises may emerge. If the dollar weakens and the yield curve steepens, international equities, emerging markets, and cyclical sectors will benefit in particular. Technology and semiconductors have tactical recovery opportunities after de-risking, but concerns over technology sector volatility and profitability will continue to recur.

Analysis framework

The report conducts cross-validation by combining the macro environment, inflation and labor markets, central bank policy expectations, the dollar and yield curve, corporate earnings and earnings revisions, valuations, fund flows, investor positioning, technical indicators, and relative sector performance, and evaluates global equity, regional, sector, and style allocations through historical comparisons and scenario-based targets.

Methodology notes

• Market styleRelative allocation between cyclicals and defensives

  Assess the performance of high-beta cyclicals relative to low-volatility defensives through earnings growth, economic activity, the yield curve, and the direction of the dollar.

  Cyclicals have stronger upward earnings revisions, and European and U.S. cyclicals have outperformed defensives by about 10% and 12% year to date, respectively; low-volatility sectors have recently weakened again, so the report judges that the tactical defensive rebound has ended.

• Market breadthRally broadening analysis

  Observe the proportion of constituents outperforming the index and the earnings gap between mega-cap stocks and the rest of the market.

  The proportion of MSCI AC World constituents outperforming the index over the past three months has recovered from an extremely narrow level of about 25% to just under 40%, while the Mag-7 earnings advantage has narrowed, indicating that the rally no longer depends entirely on a few leaders.

• Macro strategyInflation-policy-financial conditions transmission

  Assess equity financial conditions through inflation, employment, policy rate expectations, the dollar, and bond yields.

  Slowing inflation and wage growth, together with weak employment confidence, reduce the need for central banks to continue tightening; more dovish policy, lower yields, and a weaker dollar would support equity valuations and international market performance.

• FundamentalsEarnings delivery and revisions

  Compare actual earnings, earnings beat ratios, earnings revisions, and earnings growth across regions and styles.

  Second-quarter earnings delivery in the United States and Europe was strong, and Eurozone earnings revisions have continued to improve since late April, providing a fundamental basis for equity upside and regional rotation.

• Scenario analysisIndex target scenario framework

  Calculate targets for major European indices based on paths for growth, inflation, central bank policy, and geopolitics.

  The report lists December 2026 targets and potential upside for indices including MSCI Eurozone, FTSE 100, MSCI Europe, EURO STOXX 50, and STOXX 600.

Asset mapping & comparison

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

• Global equities

  Bullish

  Strengths

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

  Weaknesses

  Indices are near record highs and still face issues of valuation, concentration, and rising volatility.

  Comparison

  High-beta and cyclical styles are preferred over low-volatility defensive assets.

  Risks

  A renewed acceleration in inflation, central banks turning hawkish, another bond market sell-off, or a structural escalation of geopolitical conflicts.

• European and Eurozone equities

  Overweight

  Strengths

  Improving earnings revisions, recovering manufacturing indicators, an improving credit impulse, and attractive valuations.

  Weaknesses

  Still affected by changes in energy, trade, and external growth.

  Comparison

  The Eurozone has stronger earnings revision improvement and valuation support relative to the United States.

  Risks

  A loss of momentum in European growth, an energy price shock, or a significant strengthening of the euro suppressing corporate earnings.

• Emerging market equities

  Overweight

  Strengths

  Low positioning, cheap valuations, accelerating fund inflows, and tailwinds from a weaker dollar and Chinese policy support.

  Weaknesses

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

  Comparison

  Compared with developed markets, emerging markets usually have higher beta when the dollar weakens.

  Risks

  A renewed strengthening of the dollar, Chinese activity falling short of expectations, or a decline in global risk appetite.

• Cyclicals

  High-conviction preference

  Strengths

  Earnings growth is significantly higher than defensives, economic surprise indicators are improving, and both a steepening yield curve and a weaker dollar provide support.

  Weaknesses

  High-beta characteristics mean drawdowns may be larger when macro data weaken.

  Comparison

  European and U.S. cyclicals have outperformed defensives by about 10% and 12% year to date, respectively.

  Risks

  A renewed deterioration in purchasing managers' indices, downward earnings revisions, or rising recession risk.

• Semiconductors and Korean equities

  Tactically bullish

  Strengths

  Artificial intelligence capital expenditure continues to be confirmed, the memory pricing environment is favorable, and valuations after significant de-risking already reflect a substantial demand slowdown.

  Weaknesses

  High volatility, technicals previously broke below key moving averages, and industry positioning and capital expenditure expectations may change quickly.

  Comparison

  Both SOX and KOSPI are high-beta expressions of the global artificial intelligence and computing cycle.

  Risks

  A slowdown in artificial intelligence demand, early expansion of memory supply, or downward revisions to earnings expectations.

• Low-volatility defensive sectors

  Relatively cautious

  Strengths

  They still have defensive attributes during risk aversion or a significant economic slowdown.

  Weaknesses

  The tactical rebound in healthcare, consumer staples, and utilities is fading, and earnings growth lags cyclicals.

  Comparison

  The report believes their short-term rebound will not extend into the second half of 2026, and cyclicals will regain the upper hand.

  Risks

  If the economy deteriorates rapidly or the market enters a risk-off mode, low-volatility sectors may outperform again.

• Dollar

  Bearish bias

  Strengths

  The dollar's safe-haven characteristics remain effective during risk shocks.

  Weaknesses

  Net long positioning is relatively crowded, and dovish central bank surprises and policy intervention could both drive the dollar weaker.

  Comparison

  A weaker dollar is generally more favorable for global equities, especially emerging market and international equities.

  Risks

  A renewed rise in U.S. inflation, rates remaining high, or a surge in safe-haven demand.

Key data

• MSCI AC World year-to-date total returnAbout 14%It has fully recovered the drawdown caused by the escalation of the Iran conflict from March to April.
• Global market breadthRecovered from a low of about 25% to just under 40%The indicator is the proportion of MSCI AC World constituents that outperformed the index over the past three months.
• Momentum factor drawdownDown about 20% from the May peakShows that previously crowded trades have undergone significant de-risking.
• Maximum drawdown of the SOX IndexClose to 30% from the highThe 14-day relative strength index once approached oversold territory.
• Maximum drawdown of the KOSPIAbout 40% from the highThe Korean market is a high-beta expression of the global artificial intelligence and computing cycle.
• Recent annualized U.S. core personal consumption expenditures price inflationBelow 3%Supports the view that inflationary pressure is easing.
• Change in oil pricesDown about 30%Lower oil prices are feeding through to headline inflation in the United States and the Eurozone.
• U.S. 5-year 5-year forward inflation expectationsDid not break above 2.60%They remained broadly within a 25-basis-point range during the conflict, and long-term expectations remain relatively stable.
• U.S. second-quarter S&P 500 earnings growth expectationAbout 26% year-on-yearAverage company earnings exceeded expectations by about 11%.
• S&P 500 earnings beat ratio88%Significantly above the typical quarterly level of about 76%.
• Performance of cyclicals relative to defensivesEurope ahead by about 10%, United States ahead by about 12%Even excluding technology and artificial intelligence-related exposure, the leadership of cyclicals remains.
• Expected 2026 earnings growth for European cyclicalsAbout 25%Defensives are expected to deliver only mid-single-digit growth, and the earnings gap supports the cyclical style.
• MSCI Eurozone target420Current level is 394, corresponding to potential upside of about 7%.
• MSCI Europe target2750Current level is 2616, corresponding to potential upside of about 5%.

Impact & implications

In allocation terms, investors should continue to hold equity risk exposure and allocate incremental capital more toward cyclicals, high-beta sectors, the Eurozone, and emerging markets. A weak-dollar environment is particularly favorable for non-U.S. and emerging market equities; a steepening yield curve benefits banks and other cyclical sectors. The deep drawdowns in semiconductors and the Korean market provide a tactical window to add exposure, but the technology sector should not be viewed as the only main theme for the second half. The relative allocation value of low-volatility sectors such as healthcare, consumer staples, and utilities has declined.

Risks

• Inflation reaccelerates and forces major central banks to adopt tightening policies that are more aggressive than market expectations.
• Geopolitical conflicts continue to escalate and evolve from temporary shocks into structural energy or supply-chain disruptions.
• Bond markets sell off sharply again, causing pressure on real rates and equity valuations to rise.
• The labor market shifts from mild cooling to a clear downturn, leading to downward revisions to corporate earnings expectations.
• Artificial intelligence capital expenditure, semiconductor demand, or memory prices fall short of expectations.
• The dollar strengthens again, weakening the relative performance of emerging markets, international equities, and cyclicals.
• The improvement in market breadth fails, and indices again become highly dependent on a small number of mega-cap companies.
• Concerns over technology sector profitability and high volatility recur, preventing the tactical rebound from being sustained.

What to watch

• The subsequent pace of decline in headline and core inflation in the United States and the Eurozone.
• Whether policy expectations for the Federal Reserve, the European Central Bank, and the Bank of England shift in a more dovish direction.
• U.S. employment confidence, nonfarm payrolls, unemployment rate, and corporate hiring plans.
• Dollar net positioning, DXY trends, and signals of related foreign exchange intervention in USD/JPY.
• Whether the yield curve continues to steepen and whether front-end yields have peaked.
• Whether global market breadth can continue to expand from a level just below 40%.
• Eurozone earnings revisions, manufacturing purchasing managers' indices, and economic surprise indices.
• The earnings growth gap and price trends between cyclicals and defensives.
• The sustainability of the rebound in SOX, KOSPI, and memory semiconductors after de-risking.
• Third-quarter earnings guidance and the earnings growth gap between the Mag-7 and the rest of the market.