31 July 2026
Global Market Outlook
Now for the hard part
Oil, elevated real bond yields and central bank policy dominate the near-term market narrative. We remain constructive on risky assets, given supportive growth and earnings fundamentals, but the ride is expected to be bumpy.
Strong earnings growth to underpin global equities; stay Overweight. Our regional preferences for the US and Asia ex-Japan markets remain in place, though we seek to broaden sector exposure by upgrading US financials.
High real bond yields argue for locking in income; raise bonds to a Core holding, with a preference for Emerging Market USD bonds. Gold is reduced to a Core holding as elevated bond yields are a headwind for a speedy recovery in prices.
What is the policy outlook for major economies?
Where are the tactical opportunities?
Are your quant models still constructive on equities?
Strategy
Investment strategy and key themes
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12m Foundation Overweights:
- Global equities
- US, Asia ex-Japan equities
- Emerging Market USD bonds
Opportunistic ideas – Equities
- Global: High dividend, power & electrification^
- US: Communication services
- Asia: Hang Seng Tech, Japan banks, MSCI Taiwan^
Top Global Sectors:
- US: Technology, communication services, financials^
- Europe ex-UK: Financials, industrials
- Japan: Financials
- China: Technology, communication services
Opportunistic ideas – Bonds
- US: Treasury Inflation-protected Securities (TIPS), AAA-rated collateralised loan obligations (CLOs), utilities sector hybrids, US High-yield (HY)
- EU: Bank AT1s FX-hedged
- Others: AUD corporates
^New
Now for the hard part
- Oil, elevated real bond yields and central bank policy dominate the near-term market narrative. We remain constructive on risky assets, given supportive growth and earnings fundamentals, but the ride is expected to be bumpy.
- Strong earnings growth to underpin global equities; stay Overweight. Our regional preferences for the US and Asia ex-Japan (AxJ) markets remain in place, though we seek to broaden sector exposure by upgrading the US financial sector.
- High real bond yields argue for locking in income; raise bonds to a Core holding, preferring Emerging Market (EM) USD bonds. Gold is reduced to a Core holding as elevated bond yields are a headwind for a speedy price recovery.
Energy prices, yields and central banks dominate the narrative
H2 2026 has started on a muted note. Major equity markets, gold and the USD have held within a relatively tight range. AI and semiconductor equities have faced relatively greater headwinds as US bond yields and oil prices have moved higher.
Of the pivot points we laid out in our H2 2026 Outlook – energy prices, equity supply, investor positioning and central bank policy – energy prices and central bank policy dominate the narrative. Renewed Middle East conflict escalation resulted in oil prices rising briefly above USD 90/bbl, reigniting concerns over its inflationary impact. However, we continue to hold the view that prices will remain largely rangebound within USD 70-90/bbl, with any short-lived moves above this range likely to incentivise conflict de-escalation to avoid a bigger inflation shock and a hawkish shift by the Fed.
A more notable development in recent months has been the rise in real (net-of-inflation) bond yields. Since mid-May, the real 10-year US bond yield has risen towards 2.5% from below 2%. An extension of this move above 2.5% (the 2023 peak) would result in the highest real yields since 2008, potentially triggering a negative reaction in equities. Growing Fed policy uncertainty under Chair Warsh and persistent concerns over Developed Market (DM) debt levels are likely behind this move.
However, we believe today’s ‘soft landing’ environment will extend as the Fed avoids actual rate hikes and caps real yields. Inflation remains a risk worth monitoring, but contained oil prices and inflation expectations remain encouraging.
Fig. 1 Our proprietary model remains positive on equities, but the signal has recently softened
Standard Chartered stock-bond quantitative model
Navigating a bumpy equity market
We remain Overweight global equities relative to bonds and cash. However, as we laid out in our H2 outlook, the near-term path is likely to be a relatively bumpy one.
The trade-offs are best captured via our quantitative stock-bond model. While it remains Overweight equities, the magnitude of optimism has reduced. Fundamentals now remain the key support for stocks, with technicals and valuations turning less supportive. This matches the wider narrative of strong equity earnings growth fundamentals balancing against higher real yields and short-term worries focused on energy prices, central bank policy and AI.
On balance, we expect optimism to ultimately persist, given strong earnings fundamentals, albeit with a higher level of volatility. This is why we retain our regional Overweight views on the US and AxJ in Foundation portfolios and would consider adding to our preferred markets on pullbacks.
Broadening sector exposure via opportunistic allocations is also key to navigating the current environment. We upgrade US financials to Overweight, which leaves us with a preference for the sector across the US, Euro area and Japan equity markets. Higher bond yields remain a key driver of net interest margins (NIMs) across most regions. However, an active M&A and initial public offering (IPO) environment are also important, particularly in the US. Meanwhile, we retain our US communication services sector Opportunistic idea, with the strength in earnings growth expected to outweigh lingering doubts over the pace of AI capital expenditure (capex) monetisation.
Looking further into H2 2026, the November US mid-term election remains a volatility risk. Historically, since 1990, the S&P500 has faced an average drawdown of around 16% during US mid-term election years, with a range spanning 7.3-33%. The fact that the S&P500 already faced a 9.4% drawdown from late January to early March means we are reluctant to forecast another similar episode in the coming months. However, this historical view argues for ensuring portfolios are prepared for higher-than-usual volatility.
Fig. 2 Real yields approaching a key pivot point; a break higher would mean a shift to multi-decade highs
US 10-year real (net-of-inflation) bond yield
Locking in (real) yields
We take a glass-half-full approach to bonds, raising them to a Core holding. While we acknowledge that rising real bond yields are a potential risk worth monitoring, we expect the lack of follow-through on actual rate hikes by most major central banks to ultimately defuse real bond yields. This argues for using the rise in bond yields to lock in attractive (real) yields.
Within bonds, our preference for corporate and EM bonds over G3 government bonds remains unchanged. While the yield premium offered by the former remains relatively small by historical standards, we believe still-high credit quality continues to justify this elevated valuation.
Our Overweight to EM USD bonds reflects both strong (fiscal) fundamentals and more attractive relative value. US Investment-grade (IG) corporate bonds may face temporary headwinds from significant hyperscaler debt supply, but this reflects a temporary supply influx rather than any deterioration in fundamental credit quality, in our view.
Maintaining short duration in USD bond portfolios, however, is key to navigating these opportunities and risks. The rise in 10-year bond yields, both nominal and real, reinforces the risk of elevated volatility from excessively long maturity bonds. We do not believe the gap between short and long maturity bonds currently compensates investors adequately for the risk and, thus, prefer short (3-5 years) duration in USD bonds.
Reduce gold to a Core holding
We reduce gold to a Core holding. While prices have shown signs of stability in recent weeks, higher bond yields are setting a higher bar to beat. We remain positive on gold prices in absolute terms – now expecting USD 4,600/oz over the next 12 months – and thus see current levels as attractive to accumulate in under-allocated portfolios. However, we expect the pace of the price rebound to be relatively shallow, given elevated US bond yields.
Foundation asset allocation models
The Foundation and Foundation+ models are allocations that you can use as the starting point for building a diversified investment portfolio. The Foundation model showcases a set of allocations focusing on traditional asset classes that are accessible to most investors, while the Foundation+ model includes allocations to private assets that may be accessible to investors in some jurisdictions, but not others.
Fig. 3 Foundation asset allocation for a balanced risk profile
Fig. 4 Foundation+ asset allocation for a balanced risk profile
Fig. 5 Multi-asset income allocation for a moderate risk profile
Source: Standard Chartered Note: (i) DM IG Bonds is an aggregate of DM IG Government and DM IG Corporate Bonds; (ii) EM Bonds is an aggregate of EM USD and EM Local Ccy Government Bonds
Foundation: Our tactical asset allocation views
Fig. 6 Performance of our Foundation Allocations*
Source: Bloomberg, Standard Chartered; *12-month performance data from 29 July 2025 to 29 July 2026, Six-month performance from 29 January 2026 to 29 July 2026, Three-month performance from 29 April 2026 to 29 July 2026
Fig. 7 Opportunistic ideas performance
Macro overview – at a glance
Our macroeconomic outlook and key questions
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Key themes
Core scenario (soft landing, 45% probability): An economic ‘soft landing’ remains our base case, but we have lowered the probability from 60% in favour of a ‘no landing’. The global economy has withstood this year’s oil shock well. Business confidence picked up in June across major economies. The case for reflation has risen on the margin, given an acceleration in AI investments, the wealth effect from a booming stock market and fiscal easing in Germany and Japan. In this scenario, the Fed is likely to hold rates steady this year. The ECB is likely to deliver another ‘insurance’ hike in H2 2026, while the BoJ should hike once more this year to counter domestic inflation. China is likely to ease liquidity in H2 to revive domestic demand.
Upside risk (no landing, 30% probability): We raise the probability from 20%, expecting a de-escalation in the Middle East ahead of the US mid-term elections. If oil prices ease, US tax cuts, an AI-fuelled stock market boom and fiscal easing in Germany and Japan could boost ‘animal spirits’. A Russia-Ukraine peace deal or global defence spending boom can lift global growth.
Downside risk (25% probability): This tail risk scenario incorporates 10% chance of a recession, potentially caused by delayed restart of Hormuz shipping, a stock market downturn hurting investor confidence or a bond sell-off due to inflation or debt fears. We also assign a 15% chance to a stagflation scenario if the Middle East conflict worsens and oil settles above USD 100/bbl.
Key chart
We expect the Fed to hold its policy rate for the rest of the year amid resilient growth and elevated inflation. The ECB is likely to deliver another insurance hike, while the BoJ is expected to hike once more to counter domestic inflation.
Fig. 8 Economic activity picking up despite oil shock; inflation to return to target
Composite Purchasing Managers’ Indices; Consensus consumer inflation estimates
Policy rates watch
Fed to hold rates this year: The US economy remains resilient, with recession risk low. Full-year 2026 GDP growth estimates cluster around 2.1-2.3%, moderating towards 2.1% in 2027, supported by resilient consumer spending and strong AI investment. The dominant tailwind is AI-related capital spending, which has lifted tech investment to record shares of GDP and is broadening into non-tech sectors. The key vulnerability is concentration: growth increasingly leans on AI capex and low household savings, leaving business activity sensitive to any reversal in AI-related equity valuations.
US inflation remains above target, but is showing early signs of easing. June core Personal Consumption Expenditures (PCE) inflation slowed to 0.1% m/m and 3.3% y/y from 0.3% m/m and 3.4% y/y in May, with services inflation slowing sharply to 0.1% m/m. Core PCE inflation has run above 3%, hotter than core CPI, given tariff pass-through, tech/software prices and services. We expect inflation to settle close to 2%
once the current energy shock fades. US wage growth, the primary driver of long-term inflation, remains on a downtrend, while forward indicators of shelter inflation, which accounts for one-third of US inflation, continues to cool.
The Fed held its policy rate in July at 3.75%, although segments of the market were expecting a rate hike. We expect the Fed to hold its policy rate for the rest of the year as energy-driven inflation gradually fades and the job market remains in balance. The Warsh-led Fed has sharpened its price-stability focus while cutting forward guidance, raising the prospect of bond volatility. Nevertheless, with oil likely rangebound (USD 70-90/bbl), peak Fed hawkishness is probably behind us.
We expect another ECB ‘insurance’ hike: The Euro area entered 2026 with weak momentum, and the Middle East conflict weighed further on sentiment. A recent bounce in surveys, including a July ZEW survey beat and stronger German IFO expectations, was largely energy-driven and unlikely to last, with current conditions still depressed and
financial conditions having tightened again. Underlying activity is more resilient than headline data suggests, with growth (ex-Ireland) around 0.3% q/q, though Germany faces a possible technical recession and export weakness remains structural. Full-year 2026 GDP growth forecasts cluster in a soft 0.3-0.8% range, with a firmer recovery pencilled in for 2027 and dependent on German fiscal spending picking up.
Inflationary pressures remain muted outside energy. June inflation cooled to 2.8% y/y, with core inflation easing to 2.4%, suggesting core and services inflation have peaked. The key upside risk is a renewed energy shock – European natural gas prices have returned to March peaks. An early normalisation of Strait of Hormuz shipping (our base case) should lower inflation towards 2% by Q2 next year. Wage pressures stay contained and inflation expectations broadly anchored.
The ECB held its deposit rate at 2.25% while preserving hawkish optionality, warning the full energy-shock effects have yet to play out. We expect one more 25bps ‘insurance’ hike this year, with timing dependent on energy prices, incoming inflation, and wage data.
China to accelerate fiscal spending implementation as growth slows. China’s economic activity slowed in Q2 as domestic demand weakened further following a brief Q1 recovery, with both investment and consumption losing momentum and the housing-market correction deepening. Still-buoyant exports, supported by the global AI boom, have not been sufficient to offset the drag from soft domestic activity. Weakening credit and fiscal impulse signals softer growth ahead. With the property sector remaining a drag, export growth and expected acceleration in fiscal spending are likely to be key drivers of the economy in H2.
Inflation is turning gradually higher. The reappearance of producer price pressures is likely one reason for the central bank to keep its policy rate on hold. This ‘return of inflation’ marks a shift from the deflationary concerns that had dominated, and it constrains the scope for further monetary easing. Policymakers are unlikely to deliver broad-based stimulus, although targeted measure for priority sectors are likely. The Politburo pledged accelerated fiscal spending, including faster
execution of budgeted measures, mainly infrastructure spending on AI, the green transition and livelihood projects, while retaining a contingency plan. Monetary policy is likely to play a supplementary role: a 25bps bank reserve ratio cut is likely to keep liquidity ample, but the policy rate should stay on hold, given rising inflation, shrinking bank net interest margins (NIMs), and doubts over the effectiveness of modest rate cuts when credit demand is weak.
BoJ to hike policy rate another 25bps to 1.25% by December: Japan enters H2 2026 with robust momentum, underpinned by a strong external sector. Merchandise exports have surged, rising 19.3% y/y in June, led by semiconductor manufacturing equipment, integrated circuits and automotive shipments to Asia and North America. Manufacturing activity is expanding, with manufacturing PMI at 54.7 in July, a seventh straight month of growth, while the services PMI printed 51.9, supported by foreign tourism. Corporate capex remains resilient, with the Q2 Tankan survey projecting 11.5% large-enterprise capex growth for FY26. A tight labour market (unemployment rate steady at 2.5%) plus 5.3% total wage gains from the 2026 Shunto should lift private consumption.
With the growth backdrop clearly positive, underlying price pressures are building. Although headline consumer inflation at 1.7% y/y in June remains below the BoJ’s 2.0% target, core-core inflation of 1.7% points to persistent services-sector pressure. Producer inflation has surged to 7.1% y/y in June, its fastest in over three years, driven by energy, chemical and imported input costs, amplified by a weak yen. These upstream costs are increasingly passing through to consumers. Consumer inflation is likely to rise further once government energy subsidies expire. Long-dated inflation expectations sit above the BoJ’s target.
The BoJ held its policy rate at 1.00% in July, but used its quarterly outlook to signal a potential rate hike later this year. With real rates deeply negative, persistent inflation and yen weakness, the policy tilt remains hawkish, pointing to gradual normalisation. The main pushback against rate hikes is coming from the government, although yen weakness and a government plan to cut a consumption tax on food and beverage from 8% to 1% for two years could force a rate hike.
Fig. 9 Long-term inflation expectations subdued
US WTI crude oil, one- and five-year inflation estimates^
Source: Bloomberg, Standard Chartered; ^based on money markets, inflation-linked bonds and swaps
Fig. 10 Markets are overly hawkish about policy rates
Expected change in policy rates over the next 12 months
Asset classes
Fixed Income – at a glance
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Our view
Foundation: We raise fixed income to a Neutral allocation (Core holding) within a balanced portfolio. Within the asset class, we maintain an Overweight allocation to EM USD government bonds and an Underweight allocation to DM government bonds. We believe peak US inflation is behind us, allowing the Fed to hold rates for the rest of the year. Yields could remain elevated, particularly for longer-duration bonds, driven by a high term premium demanded by investors. DM IG and HY are both Neutral allocations, as corporate bonds continue to offer carry, though there is limited room for further spread compression. Corporate fundamentals remain resilient, with stable leverage and strong interest coverage, supporting our preference for credit over rates. In EM, we prefer exposure to USD-denominated government bonds over local-currency (LCY) bonds.Opportunistic ideas: We are bullish on US HY bonds, European bank Additional Tier-1 (AT1) bonds (contingent convertibles [CoCos1]; FX-hedged), US TIPS, AAA-rated CLOs, US utilities sector corporate hybrids and AUD corporate bonds.
Opportunistic ideas: We are bullish European bank additional tier-1 (AT1) bonds (contingent convertibles [CoCos1]; FX-hedged), US TIPS, AAA-rated collateralised loan obligations (CLOs), US utilities corporate hybrids and AUD corporate bonds. We have closed the short-duration US HY bonds idea and replaced it with a new bullish idea on broader US HY bonds.
Key charts
Fig. 11 Rate forecasts and our view of bond classes
DM rates – Underweight
We are Underweight DM IG government bonds. In the US, the term premium – the compensation demanded by investors for holding long-duration bonds – is expected to remain structurally elevated. This is underpinned by a confluence of persistent macro headwinds, such as above-target inflation, a deteriorating fiscal trajectory, an ongoing uncertainty in the Middle East, and more recently, heightened monetary policy ambiguity following the Fed’s removal of forward guidance and its internal restructuring across five task forces.
That said, the softer-than-expected June CPI has reinforced our conviction that peak US inflation was behind us in Q2, providing the Fed ample cover to hold rates through year-end. As disinflationary momentum consolidates, we expect the Fed to gradually shift its attention towards emerging labour market softness – a transition that culminates in our expectation for the Fed to deliver a single 25bps rate cut in H1 2027.
Against this policy backdrop, we expect the US yield curve to transition into a steepening regime (the short-end yield fallingThis eventual policy pivot means we expect the US yield curve to transition to a steepening dynamic over the 12-month horizon, as the front end rallies in anticipation of Fed cuts while
faster than the long-end yield) over a 12-month horizon, with the front-end rallying in anticipation of Fed easing and getting increasingly priced, while the long-end anchored under structural pressures. Within this context, we maintain a preference for the 3-5-year area of the curve and retain our Underweight to long-duration bonds, where the combination of an elevated term premium, fiscal deterioration and subdued demand technicals continues to present an unfavourable asymmetry. We set our three- and 12-month forecasts for the 2-year US government bond yield at 4-4.25% and 3.75-4%, respectively. For the 10-year bond yield, we target 4.50-4.75% over three months and 4.25-4.50% over 12 months.
The Euro area continues to face a more challenging inflation backdrop, driven by elevated energy prices, given its status as a large commodity importer. Economic data has been weakening, and we expect the ECB to deliver another ‘insurance hike’ of 25bps before year-end, following the 25bp hike in June. Should economic conditions deteriorate, the central bank could react promptly by easing monetary policy.
In Japan, we expect the BoJ to stick to its tightening path, but policy reactions are still deemed to be lagging economic fundamentals (behind the curve). We expect further upward pressure on Japan Government Bond (JGB) yields and expect them to underperform US government bonds on an FX-hedged basis.
DM corporates – Core holding
We maintain a Neutral allocation to both DM IG and DM HY corporate bonds. While we acknowledge there is limited room for corporate spreads to compress materially from current levels – especially with US IG index spreads around 80bps – we expect dispersion to increase from here.
Fig. 12 Tech and communication bonds underperformed due to heavy primary pipeline
Bloomberg US IG Corp sector indices, 12-month OAS changes
As an income proposition, HY remains supported by all-in yields of 7%-plus and broadly benign default expectations. The HY Index has also seen an increasing share of BB-rated credits, suggesting that credit quality within the index continues to improve.
Fig. 13 DM HY corporate spreads are also close to historical lows
Bloomberg Global HY Corp Index, OAS
IG corporate spreads remain close to historical tights. AI capex-driven issuance has reached elevated levels, with US IG gross issuance year to date (YTD) in 2026 at c.USD 1.2trn.
New issues have come with more concessions, as a few new issuances have underperformed in the secondary market, particularly in the tech sector. However, the bonds have generally been well absorbed by resilient demand, including strong foreign inflows and retail exchange-traded fund (ETF) buying, supported by the attractiveness of still-elevated overall yields.
Fig. 14 DM IG corporate spreads hover at tight end
Bloomberg Global Agg Corp index, OAS
EM government bonds – Overweight USD/Core holding for LCY
We reaffirm our Overweight view on EM USD government bonds and maintain a Neutral stance on EM LCY government bonds. Since June, the narrative has shifted from an Iran-related risk-premium unwind to a more durable, carry-led environment in which spreads have remained resilient. Recent episodes of spread widening by EM USD sovereigns have been short-lived, suggesting investors remain willing to buy dips as long as global growth holds up.
Fig. 15 Meaningful yield pick-up over DM peers
Bloomberg EM USD, LCY Government Bond Index and Global Treasury Index, yield to worst, last 20 years
Our Overweight EM USD government bond stance is supported by a 2%-plus yield pick-up vs. DM bonds, resilient external fundamentals and favourable technicals. EM USD sovereigns also benefit from a more oil-resilient index composition, with non-oil importers representing 67% of exposure vs. 46% for EM LCY debt, providing a relative buffer against oil-price shocks. Concerns that heavy US tech-sector issuance could crowd out EM demand appear overdone, with history suggesting EM IG sovereigns have often proven resilient and could even outperform if pressure on US IG spreads persists.
On LCY, EM FX has recoupled with the USD, and volatility remains above its 10-year average. As a result, alpha is likely to come from country selection rather than broad beta exposure. The main risks to our view are a prolonged Middle East conflict escalation driving oil sharply higher, a hawkish Fed surprise and a stronger El Niño impulse into H2 2026.
Asia USD bonds – Core holding
We retain a Neutral allocation to Asia USD bonds, an asset class that continues to reward investors with attractive nominal yields, favourable supply-demand technicals and robust credit fundamentals, underpinned by healthy cash flows, low leverage and a high share of sovereign-linked issuers that lend the segment a defensive quality.
This resilience has been evident YTD, with Asia USD bonds delivering positive total returns, achieving modest spread tightening relative to US government bonds, and outperforming US IG bonds. We believe this relative strength can persist, as Asia USD bonds remain structurally insulated from the currency headwinds currently weighing on currency markets across the region, which anchors our conviction in the asset class even as we maintain a Neutral stance.
Equity – at a glance
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Our view
We remain Overweight global equities. The headwinds we see include rising bond yields and uncertainty surrounding the Middle East conflict. Against this, earnings growth remains robust, driven by AI investments, the impact of which extends beyond the tech sector to the broader economy. On balance, we expect an economic soft landing to support growth and gains in global equities. We are Overweight US equities, where earnings growth is being revised upward as we go through the Q2 earnings season. We are also Overweight AxJ equities, a key beneficiary of AI capex and the potential reopening of the Strait of Hormuz.
Within AxJ, we continue to be Overweight Taiwan, with good visibility on AI-related semiconductor growth, Overweight China for its valuation re-rating potential amid rapid innovation and Overweight India for its non-tech-driven domestic growth.
We maintain aCore allocation to Japan, where fiscal stimulus and a reflating economy offset energy import vulnerability. We remain Underweight UK equities, given their relatively muted earnings growth and low exposure to growth sectors
Key chart
Q2 2026 US earnings are expected to grow higher.
Fig. 16 Overweight views on AxJ and US equities are supported by robust earnings growth. US equities’ Q2 growth forecasts have been revised upward
Consensus 2026 and 2027 earnings growth estimates for MSCI equity indices; MSCI US quarterly earnings growth y/y
Staying focused on the fundamentals
The Middle East conflict remains volatile, with similar volatility in oil prices. Meanwhile, bond yields have risen higher, driven in part by oil-linked inflationary pressures. Higher bond yields have a negative impact on equity valuations. Based on our calculations, every 25bps rise in the cost of capital or discount rate can weigh on global equities to the tune of around 3-4%. However, with earnings growth of 15-30% in 2026 and 2027, we believe there is enough cushion for global equities to absorb any yield-related shocks. This leaves us positive on equities.
The technology sector continues to lead in terms of earnings growth, driven largely by AI investments. The trend here remains positive, with the US Q2 earnings season seeing a rise in AI-related capex. This capex has a positive impact that goes beyond the tech sector to the broader economy: the financial sector benefits from a rise in financing activities, industrials from the build-out of AI infrastructure and utilities from the rise in power demand.
While sentiment towards AI has deteriorated in recent weeks, we view the fundamental outlook as intact. AI investment plans are being revised upwards as adoption continues to rise. The emergence of lower-cost AI models from China is causing some concerns, but we believe the eventual outcome will be industry expansion and innovation. The market opportunity remains sufficiently large for multiple players to benefit and co-exist, rather than creating a ‘winner-takes-all’ outcome. The Big Tech companies doing the heavy lifting in AI capex have seen a widening in their credit spreads, but they continue to have strong earnings power and solid balance sheets to finance the investments, which will drive multi-year revenue growth.
Fig. 17 AI capex continues to rise, supported by monetisation trends
Global AI capex
US equities – Overweight
We continue to see future earnings estimates being revised upward as the Q2 earnings season progresses, pointing to greater confidence in the growth outlook. Volatility is expected, though, particularly in the months leading up to the November US mid-term elections, where history teaches us to expect higher volatility.
AxJ equities – Overweight
AxJ enjoys the highest earnings growth among major markets, as its technology sector remains a key beneficiary of AI capex. Within AxJ, we are Overweight Taiwan, China and India equities. While Taiwan benefits from good visibility on AI-driven growth, China is undervalued, in our view, given its innovation and growth outlook. India offers diversification from the AI narrative, with domestic-driven growth. We continue to expect the Strait of Hormuz to reopen, with the ensuing lower oil prices a positive catalyst for India.
South Korea equities remain a Core holding for us. We are positive on the long-term agreements driving growth for the memory chips industry there, but the market continues to be extremely volatile, with leveraged investor positioning. We are Underweight ASEAN, which has relatively less exposure to growth sectors and hence more muted earnings growth, compared to the tech-heavy AxJ market.
Fig. 18 US equity valuations are high but not at extreme levels, while AxJ valuations are attractive
12-month forward P/E ratio of regional MSCI indices
Japan equities – Core holding
Fiscal support for strategic investments continues to buoy a reflating economy, supporting nominal earnings growth. Rising rates in Japan could, however, lead to a stronger currency over the next 12 months, a headwind for exporters.
Europe ex-UK equities – Core holding
Europe ex-UK benefits from fiscal stimulus plans, particularly in Germany. Rising M&A activity also supports equity valuations there, although it still lags the earnings growth in the US and AxJ.
UK equities – Underweight
The UK has a defensive sector composition that would do well in a weak market environment. We expect any market weakness to be temporary though, as strong earnings eventually drive the market higher, led by growth-oriented regions, such as the US and AxJ. Fiscal uncertainty is also likely to weigh on the economy and the GBP, making returns less attractive for USD-based investors.
Equity opportunistic views
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Add global power & electrification, Taiwan
- We initiate an Opportunistic idea on global power and electrification following upward revisions to our AI capex forecasts. We expect a surge in AI and data centre power demand to drive a multi-year grid and electrification investment cycle. We believe electricity could become a bottleneck for the physical AI build-out, but closing the shortfall requires both capex and time, which supports strong earnings visibility for grid equipment makers.
- We initiated an Opportunistic idea on MSCI Taiwan in our Long Story Short publication on 10 July 2026. Taiwan’s foundry leadership makes it an indispensable supplier to major US technology and semiconductor companies, especially for advanced nodes. Beyond foundries, and to support the increasingly complex requirements of each successive chip generation, Taiwan’s AI hardware suppliers are posting some of the fastest revenue growth in the entire AI supply chain, while the valuation gap to the US supports a continued re-rating.
- We recently took profit on MSCI World Equal Weight for a 2.2% gain (21 May 2026-9 July 2026). While we still expect earnings growth to broaden, we now see better tactical opportunities elsewhere.
Fig. 19 Opportunistic ideas
Ongoing ideas
Japan banks: BoJ policy normalisation drives NIM upside, while Japan’s reflation cycle should support nominal loan demand, corporate capex and wealth activity. Governance reform is a rate-cycle-independent re-rating driver, including recycling legacy holdings towards growth, buybacks, and dividends. Japan’s new policy to facilitate financing for large-scale projects such as M&A and data centres gives Japanese megabanks greater flexibility to underwrite larger transactions and should support a more sustained corporate investment cycle over the medium term.
Global high-dividend equities: They tend to deliver more stable returns, and the income yield helps cushion against market volatility and downside risks.
US communication services: We remain constructive on the sector and continue to expect upward earnings revisions, driven by improving digital-ad spending and AI monetisation.
Hang Seng Technology: Tech innovation remains a priority under China’s 15th Five-year Plan, while a strong AI-related IPO pipeline and reasonable valuations support sentiment
Sector views: Continue to broaden & diversify
This month, we upgrade the US financial sector to Overweight, supported by a capital markets and M&A recovery and NIM resilience in a higher-for-longer rate environment. We downgrade US healthcare to a Core holding on the back of subdued earnings growth and headwinds from potential budget constraints. US technology and communication services remain Overweight, driven by structural AI tailwinds and broadening monetisation opportunities. We remain Overweight Europe ex-UK financials on robust balance sheets and sustained shareholder returns. Europe ex-UK Industrials and Japan financials remain Overweight, supported by EU fiscal stimulus and BoJ policy normalisation, respectively.
In China, we maintain a pro-risk stance as a re-rating potential remains intact. We are Overweight technology and communication services on AI infrastructure investment and rising platform monetisation, while real estate and consumer staples remain Underweight amid the low visibility on the housing market’s recovery and weak consumer sentiment.
Fig. 20 Our sector views
Gold, crude oil – at a glance
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Our view
- We move gold to a Core holding and lower our 3- and 12-month price targets to USD 4,300/oz and 4,600/oz, respectively.
- We raise our three-month West Texas Intermediate (WTI) crude oil price forecast to USD 90/bbl while maintaining our 12-month target at USD 70/bbl, reflecting intensifying geopolitical and transit route risks.
Key chart
Fig. 21 Gold is trading closely with real yields again
Gold returns vs. changes in 10Y US TIPS yields
Fig. 22 Hormuz disruption has lifted oil’s risk premium
Strait of Hormuz crude tanker crossings, 2021-26 YTD
Fig. 22 Central banks anchor gold’s long-term case
*Share of respondents: Expected increase in gold reserves
Fig. 24 Low US inventories limit the supply
Total US crude oil stocks, 2021-26 YTD, million barrels
Gold outlook: We shift our stance on gold as the rally transitions into a rangebound phase following January’s record highs. While resilient central bank and Asian demand provide a long-term anchor, gold’s sensitivity to real yields and the USD has re-emerged, with macro factors once again driving price action. Higher bond yields reduce the scope for further gains, likely limiting the pace of any rebound. Consequently, we expect a period of consolidation as the market balances gold’s enduring structural appeal against immediate macro headwinds.
Oil outlook: Renewed Middle East tensions and persistent threats to key transit routes have reintroduced a significant risk premium, overshadowing near-term supply-demand fundamentals. While these disruptions should sustain near-term upward price pressure, our base case assumes prices will retreat quickly if transit conditions improve or tensions ease. Uneven demand growth and improving supply availability should reassert themselves, shifting the market back to a fundamentals-driven range of USD 70-90/bbl.
FX – at a glance
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USD view
We have raised our three-month forecast for the US Dollar Index (DXY) to 101.5, up from 100. We see firm US growth, sticky core inflation and firm real yield differentials supporting the USD in the near term. Meanwhile, US corporate earnings sustain strong equity and credit portfolio inflows, while persistent Middle East conflict flare-ups provide a terms-of-trade and safe-haven floor. Even soft consumer inflation prints have failed to break the USD, validating a bullish asymmetry in the near term.
We expect the DXY to ease modestly to 99 on a 12-month horizon. We maintain our view of flat policy rates through 2026. Major central banks other than the Fed are in rate hiking cycles, which should eventually narrow interest rate differentials and cap further USD upside. Meanwhile, Fed repricing looks largely complete, leaving limited room for further hawkish surprises, while US growth outperformance mean-reverts and economic surprises roll over. Positioning has swung from short to crowded long, removing a key marginal buyer just as seasonals soften. Structurally, the USD trades roughly 16% above purchasing power parity fair value, the net international investment position has ballooned to -67% of GDP and investment income has turned negative. With the US current-account deficit financed by equity inflows, any fading of foreign appetite – potentially amid an AI trade wobble – would likely drag the USD into a cyclical, and ultimately structural, downtrend.
Key charts
Fig. 25 USD interest rate differentials stalled around five-year average; 12m upside risk is likely limited
DXY, weighted interest rate differentials & five-year average
Fig. 27 AUD/USD is likely to outperform, supported by rate differentials advantage
AUD/USD and yield spread
Fig. 26 USD/JPY diverges with yield spread amid offset by rising oil prices; expect corrections if tensions ease
USD/JPY and yield spread
Fig. 28 MAS increased the rate of appreciation of the SGD NEER policy band; we expect USD/SGD downside
SGD NEER and estimated policy band
Fig. 33 Summary of currency forecasts and drivers
Additional perspectives
Quant perspective: Reduce equity Overweight due to frothy valuation
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Summary
Our stock-bond model (3-6 months) has further trimmed its Overweight allocation to global equities in July to 16% from 24% due to softer market technicals. Although solid fundamentals remain the backbone of the model’s Overweight allocation to equities, rising equity valuations and softer market technicals have prompted a toning down of the allocation. From a fundamental perspective, we see strong support for risk assets as earnings upgrades continue to rise, economic sentiment remains buoyant and global economic data continues to surprise to the upside. The model recorded a YTD return of 10.1%, which translates to 3.4% of outperformance relative to the 60/40 equity/bond benchmark.
Machine learning (ML) models show higher bear market risks for equities, but the probabilities of a steep correction remain low at 12% for the S&P500 Index and 18% for the MSCI AC World Index. For the S&P500, the rise in correction risk comes from a higher Volatility Index (VIX) following renewed conflict escalation in the Middle East, but other risk indicators, such as EM FX volatility, remain subdued, and market momentum has only softened mildly. For the MSCI AC World, correction risk is higher due to a relatively higher option-market implied volatility compared to historical volatility. Further, the higher correlation between agricultural prices and global government bond yields also indicates an increased risk from inflation shocks.
Positioning indicators signal a higher likelihood of an upward reversal in EUR/USD and AUD/USD and a downward reversal in MSCI Singapore and USD/CAD. Investorpositioning in EUR/USD and AUD/USD is 2 std deviations below the historical average, while market diversity in MSCI Singapore and USD/CAD has narrowed after their recent strong gains.
Key chart
Our stock-bond model reduced its Overweight equity position further as net-advances in global stocks appear stretched, signalling a higher likelihood of near-term consolidation.
Fig. 30 Breakdown of our stock-bond rotation model’s scores
Our model reduced equity Overweight to 16% from 24% as the model score fell to +2
VIX has risen following renewed escalation in the Middle East, but other risk indicators remain subdued, while market momentum has only mildly softened.
Fig. 31 Our technical model remains bullish on the S&P500
S&P500 Index; model’s bearish signal; technical support and resistance levels
Fig. 32 Long- and short-term quantitative models remain bullish on risk assets
Long-term models below have a typical time horizon of 3-6 months, while short-term models have a 1-3-month horizon
Performance review
Foundation: Asset allocation summary
Foundation+: Asset allocation summary
Market performance summary
Our key forecasts and calendar events
SC Wealth Select
Explanatory notes
- The figures on page 5 show allocations for a moderately aggressive risk profile only – different risk profiles may produce significantly different asset allocation results. Page 5 is only an example, provided for general information only and they do not constitute investment advice, an offer, recommendation or solicitation. They do not take into account the specific investment objectives, needs or risk tolerances of a particular person or class of persons and they have not been prepared for any particular person or class of persons.
- Contingent Convertibles are complex financial instruments and are not a suitable or appropriate investment for all investors. This document is not an offer to sell or an invitation to buy any securities or any beneficial interests therein. Contingent convertible securities are not intended to be sold and should not be sold to retail clients in the European Economic Area (EEA) (each as defined in the Policy Statement on the Restrictions on the Retail Distribution of Regulatory Capital Instruments (Feedback to CP14/23 and Final Rules) (“Policy Statement”), read together with the Product Intervention (Contingent Convertible Instruments and Mutual Society Shares) Instrument 2015 (“Instrument”, and together with the Policy Statement, the “Permanent Marketing Restrictions”), which were published by the United Kingdom’s Financial Conduct Authority in June 2015), other than in circumstances that do not give rise to a contravention of the Permanent Marketing Restrictions.
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