Equity Perspectives - Fourth Issue 2026

Our thoughts

• Exceptional Q2 reporting season, with proportion of stocks beating estimates up materially (~88% of reporting firms beat expectations, well above the ~76% historical beat rate). S&P 500 index’s Q2 earnings growth is estimated at ~31% year-on-year excluding income related to some private investment stakes. AI infrastructure stocks which have benefitted from higher capex spending have driven roughly half of the Q2 earnings  per share (EPS) growth, although earnings growth for the rest of the market has also shown positive signs of acceleration, with potential broadening trends expected in second half (2H) 2026.
• In their latest results release, US hyperscalers have affirmed continued hike in AI capex plans, which has further supported AI infrastructure stock returns, although longer term clarity is still awaited on the AI monetisation story, while recent Kimi K3 launch from China has also increased investor scrutiny on US firms to find greater efficiencies and advancements in algorithms.  

• On key calls, we still favour investing in multiple sectors beyond tech which also benefit from elevated hyperscaler capex investment plans (such as industrials, utilities and materials) and continue to see positive medium-term risk-reward in key bottleneck areas of semiconductors, memory and power infrastructure/ electrification, where demand/supply dynamics are expected to remain imbalanced going into 2027. For semiconductors, our thesis is maintained for continued strong earnings growth momentum, with still favourable memory pricing dynamics amid elevated AI capex plans. Following recent de-risking in investor positioning, we see tactical entry opportunities opening up although investors will need to be able to tolerate the higher volatility expected for the sector.
• We remain selective stance with broad valuations now trading at the higher end, reflecting more robust earnings growth expectations. The S&P 500 index last trades at 19.2x forward price/earnings ratio (as of 16 August 2026), about +1 standard deviation above its past 5Y historical average multiple of 17.9x. 2026E & 2027E consensus forecasts for MSCI US earnings growth has been upgraded to 28.5% & 16.7% respectively, higher vs World’s 24.7% & 14.6% earnings growth expected.

Our thoughts

• Despite persistent market uncertainty, the STOXX Europe 600 Index has demonstrated notable resilience in recent months, hitting fresh record highs in August 2026. This performance has been supported by undemanding valuations, particularly when compared to the relatively elevated US market. A potential agreement between the US and Iran is expected to boost risk appetite and reduce geopolitical tensions, supporting more economically-sensitive markets in Europe.
• We have also revised our sector allocations, upgrading European travel & leisure, automobiles, and media to Neutral, while European Banks have been upgraded to Overweight to reflect a potential rotation into more cyclical areas. Separately, because European benchmarks are less concentrated in mega-cap tech, they offer a more diversified investment approach. Performance has been assisted by a supportive earnings season. Even when excluding energy, corporate profit growth for European firms remains robust at ~12%.

• Q2 2026 results season has delivered EPS growth of ~24% YoY, ahead of consensus expectations and is on course for the strongest quarter in several years, with energy and financials accounting for most of the upside. This is despite a recent re-escalation of tensions in the Middle East. At the same time, wildfires in Europe could lead to higher insurance losses, transport and supply chain disruptions, and weaker consumer spending, which could yet be reflected in future quarterly results. 2025’s unprecedented fiscal spending plan in Germany that supports both infrastructure and defence spending, is still a key multi-year secular driver for a range of sectors, even if initial spending has been slower than anticipated.  
• Separately, the FTSE 100 has regained momentum, although yet to retest February 2026’s record high. The UK has navigated a turbulent political backdrop – Prime Minister Keir Starmer resigned and former Manchester mayor Andy Burnham replaced him. Investors will likely await the Labour Party conference in September 2026 and the subsequent Autumn budget for clearer signals on fiscal and economic policy.  As of 17 August 2026, the FTSE 100 was valued at 13.2x forward P/E. Our stance remains Neutral.