New technologies may continue to support global equities

By Alex Tedder, CIO Equities, and Tom Wilson, Head of Emerging Market Equities, at Schroders

Notwithstanding market concentration, relatively high valuations and rising fears about a potential AI bubble, the outlook for global equities isn’t necessarily negative. Positive economic momentum, robust earnings support and structural investment in new technologies may underpin global markets for a while yet.

In 2024, against a backdrop of macroeconomic and geopolitical uncertainty, global equities delivered 18% in US dollar terms. In 2025 so far, despite ongoing political volatility, global equity markets have again performed extraordinarily well, producing a return of 20.5% in dollars at the time of this writing.

A number of factors are at work. The US economy remains robust, supported by massive fiscal stimulus (as with the One Big Beautiful Bill Act); high levels of capital expenditure, particularly by big tech companies; solid wage growth; and low energy prices. President Trump’s tariff policies have accelerated inward investment in the US and, so far at least, not led to higher inflation. The overall result has been strong earnings growth: earnings for the S&P 500 are likely to rise by 13% year-over-year overall in 2025. It is not surprising, therefore, that investors have simply looked through the geopolitical noise and focused on the fundamentals.

In the rest of the world, optimism has also prevailed, with both European and Asian markets notching up some of their best returns in many years. The drivers of return have so far been slightly different, however, as economic momentum and earnings growth have been much more muted in both regions. Re-valuation has been the primary factor. Investors are anticipating economic recovery in 2026. Overall consensus estimates are strong: Europe, Asia and the US are now forecast to generate 12-15% earnings growth next year.

Valuations are high but could stay that way (for now)

A valid concern is that markets are already more than discounting a positive growth scenario. Almost all markets around the world look expensive relative to recent history, trading at multiples well above their 15-year medians. Long-term fundamental measures such as the cyclically adjusted price-to-earnings ratio (CAPE) or the market-cap-to-GDP (gross domestic product) measure (favored by Warren Buffett) are flashing red. The doubters can certainly point to the fact that, historically, markets have always reverted to the mean, and that suggests significant downside from current levels. While that is a risk that rightly looms large in our daily debate, all the market dynamics we have noted here lead us to believe those elevated valuations are sustainable for the time being. Short-term interest rates in many countries are likely to fall, providing support to market multiples, specifically in the US. As confidence levels in economies such as China, India or Brazil begin to improve, there could be strong demand for assets in these markets, particularly given diversified risk exposure.

Structural factors, such as China’s transition to becoming a technology giant (already evident in the electric vehicle, renewable energy and robotics sectors), are also probably being underestimated by the market. Similarly, in Europe, structural drivers such as technology infrastructure and energy transition remain fundamentally underestimated, in our view. All these factors suggest that relatively high valuations can be sustained and could go higher still.

Concentration in itself is not a bad thing

There is understandably much focus on the degree of concentration in equity markets, particularly in the US. The 10 largest technology names now account for around 40% of the S&P 500 market capitalization, a record high.

Looking back in time, it’s clear that every major phase of innovation has been characterised by prolonged periods of concentration. Unlike previous phases, the current technology-driven innovation wave is composed of multiple innovation cycles, of which the most recent (and most rapid) is evident in the field of large language models, otherwise known as Generative AI.

The share price performance of the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) has been driven by gigantic investment in AI infrastructure. The rises in capex in recent years represent a relatively small proportion of their operating cashflows. The biggest spenders have scope to increase spending quite a bit further if they deem it appropriate.

As the numbers have grown, so, too, have doubts about the likely return on investment and the circularity inherent in the current AI supply chain. With the largest firms accounting for more than 70% of total S&P 500 capital expenditure this year, it is no exaggeration to say that the fate of the US stock market, as a whole, depends on continued confidence in the future of AI.

For now that confidence remains intact. There are some signs of irrational exuberance, as reflected in the outsized performance of AI-related companies with no earnings or even no revenues. However, the total market capitalization of those companies is small. The much more important question at this point is whether AI models can monetise at a rate that justifies the huge expenditures outlined above. There have been some encouraging signs in this regard, with Google parent Alphabet reporting a material contribution to revenue growth in cloud, search and even YouTube from AI-related deployment.

Interestingly, ChatGPT itself is already generating revenue: about $20 billion in 2025. Based on our analysis, ChatGPT models could generate revenues of $200 billion by 2030. That puts the current $500-billion market valuation of parent OpenAI into sharp context. If the company were listed, a not unrealistic valuation would be 10 times forward sales, implying a $2-trillion market capitalization. Given that AI-chipmaker Nvidia currently commands a $5-trillion valuation, the enthusiasm for AI investment suddenly becomes quite rational.

After a strong run, can a bull case still be made for EM equities in 2026?

Emerging market (EM) equities have performed strongly in 2025, outperforming global equities. After more than a decade of underperformance, are we at an inflection point and to what extent can EM equities continue to deliver good US dollar returns in 2026?

Emerging markets are not homogenous, so it helps to look at EM with regard to its constituent parts. Four countries make up 80% of the MSCI EM equities benchmark: China, India, Taiwan and Korea.

China faces ongoing structural and cyclical economic headwinds: investment remains too high a share of gross domestic product (GDP), debt levels are elevated, the economy suffers excess capacity and persistent deflation and appears to be in a liquidity trap. A real estate bust has materially damaged local government finances and continues to suppress household confidence. However, China is highly innovative and competitive, which combined with ongoing improvements in product quality, is enabling both import substitution and an ongoing increase in export market share. Its equity market is very broad, and we can find multiple idiosyncratic stock opportunities. Furthermore, in the near term, abundant liquidity is proving a stronger driver of share prices than nominal growth. Geopolitical tension will continue, but China’s dominance in rare earth processing and magnets has proven a key point of leverage that defends China against excessive US tariff and non-tariff action. Valuations have lifted, having been cheap 12 months ago, but are reasonable, and we remain constructive on China.

India has delivered soft US-dollar returns in 2025 and has materially underperformed after a long period of outperformance. Equity valuations have improved but while financials valuations are attractive, non-financials valuations remain expensive. ​ Equity supply has been a significant offset to domestic fund flows in 2024 and 2025, and other parts of emerging markets have offered better valuations and similar or better earnings growth. However, relative performance may at some point inflect. The narrative of structural growth is well recognised. On a shorter horizon, low inflation and a soft dollar have facilitated monetary easing, and we have also seen some modest fiscal easing. This should support a recovery in nominal growth from relatively low levels. A further catalyst may come in the form of tariff relief as the US tariff premium on India’s import of Russian crude may at some point be removed, even if there is ongoing risk around India’s service exports to the US. Finally, if the AI theme rolls over, India would likely benefit from a redirection in flow.

This brings us to Taiwan and Korea. Taiwan’s benchmark is currently 85% technology, Korea is 50% technology. AI hardware spend has been a powerful performance driver in 2025. While management commentary, positive earnings dynamics and a further material increase in capex guidance have strengthened our conviction that AI-related tech demand will remain robust into 2026, there is uncertainty on capex in 2027. There are outstanding questions on the timing of AI monetisation, the dilution of hyperscaler returns and potential power constraints. At this time, information technology warrants an overweight, given its strong earnings momentum, but valuations have risen, and investors should be disciplined in trimming tech companies that run ahead of fundamentals.

Finding opportunities beyond the big four

Given their scale, the above four markets dominate EM beta. However, for active investors, there remain plenty of alpha opportunities in the universe. We think favourable conditions warrant an overweight allocation to Brazil. Equity valuations are attractive, the real effective exchange rate is cheap, and real interest rates are very high. Elections in Brazil in October 2026 may see President Luiz Inácio Lula da Silva lose to a centre-right candidate. A more fiscally responsible centre-right government would calm fears about fiscal sustainability and drive a material compression in real rates. This would reduce the cost of capital, drive a marked rerating, support the currency and drive an uplift in domestic equity allocations from low levels. While this is partly anticipated by markets, we believe the risk/reward lies in favour of investors. Meanwhile, low inflation will permit a degree of monetary easing in 2026, and Federal Reserve easing and a soft dollar would provide additional support.

US dollar depreciation on a structural basis

This leads us to talk about the US dollar and longer-term trends. We are inclined to anticipate US dollar depreciation on a structural basis, given its rich valuation, a diminished appetite for foreign funding of US deficits and longer-term potential for fiscal monetisation. US dollar depreciation would provide a tailwind to EM relative equity performance as it eases financial conditions and has a positive translation effect, benefitting dollar-nominal growth and earnings. There is a historic inverse correlation between the US dollar and EM equities relative returns. This may combine with attractive relative valuations, and a potential stabilisation or improvement in relative return on equity (ROE). This is the bull case for EM but, as ever, the outlook is uncertain.

Proceed with confidence, invest with caution

Our optimism about the outlook for 2026 doesn’t diminish our awareness of the risks. If as we expect, markets continue to rise, the risk of a major correction by definition becomes more acute. That is particularly true with valuations already at stretched levels.

The old adage that bull markets don’t die of old age is probably as valid today as it has ever been. It implies that there has to be a catalyst for a substantial correction to take place. At the moment, there is no clear catalyst in sight. Sooner or later, however, a catalyst will come along, in our opinion, most likely from the bond market. Trump policies, whilst proving effective in the short-term, are potentially storing up trouble in the form of higher inflation and rampant federal debt.

There are multiple other potential catalysts, any of which could precipitate a reset in market valuations to more normal levels. In such circumstances, most assets will do quite poorly. Within equities, there is nevertheless a cohort of unloved, cash-generative and well-funded companies that could do relatively well. Increased exposure to selective healthcare, consumer and utilities stocks will likely offer useful diversification when the correction comes.

Further reading

All Schroders Outlook 2026 articles can be found here.

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