Global equity markets have delivered a dramatic start to 2026. A sharp correction in the first quarter was swiftly followed by a V-shaped recovery, underscoring both the fragility and resilience of investor sentiment. Yet, beneath the volatility lies a more constructive story of robust corporate fundamentals. According to LSEG I/B/E/S, 83% of S&P500 companies beat earnings expectations in Q1 2026 (as of 1 May) – a striking testament to underlying earnings strength. Markets have rewarded this resilience, and with mid-to-high-single-digit upside still in sight, the case for equities remains intact.

However, while the headline figures are encouraging, the internal dynamics of the rally are beginning to shift.

From concentration to diversification

Thus far, equity gains in 2026 have been highly concentrated. Roughly 50% of global equity upside – and an even higher share in Asia ex-Japan (AxJ) – has been driven by a single industry, namely semiconductors. This concentration reflects the early stages of a powerful technological cycle, where infrastructure builders and enablers typically lead. Investors who positioned early in this theme, particularly in semiconductors, have been handsomely rewarded.

The next phase of the rally will likely look very different. Instead of a narrow group of outperformers, we expect the rally to broaden across diversified sectors, regions and industries. At the heart of this transition is the evolution of the artificial intelligence (AI) theme. As AI adoption accelerates, the locus of value creation is beginning to move downstream. According to US Census Bureau data, AI adoption is approaching a critical threshold of 20%. Historically, in prior technology cycles, such as those for smartphones and cloud computing, this level of penetration marked a key inflection point. Beyond this threshold, the beneficiaries tend to shift from early enablers to adopters, and we believe AI is approaching this moment.

As AI adoption broadens, companies that leverage AI – particularly internet platforms and other downstream industries – are poised to capture a larger share of the value. These firms are better positioned to monetise AI applications at scale, translating technological capability into revenue growth and profitability. Meanwhile, supply constraints in areas such as memory chips could persist, but strong end-demand should allow companies to pass on higher costs and preserve margins across the value chain.

For investors, this has clear implications. The concentrated positioning that worked in the early stages of the AI cycle is unlikely to deliver the same returns going forward. Instead, a more balanced approach is warranted – one that spans hardware, platforms and end-use industries. This includes not only technology sectors but also non-tech adopters in healthcare and financial services, where AI-driven productivity gains are increasingly evident.

Navigating regional divergence

The theme of broadening extends beyond sectors to regions. AxJ has been a standout performer year-to-date, significantly outperforming global equities, but this very strength argues for caution. With valuations reflecting much of the good news, it makes sense to take profit and move to a more neutral stance. At the same time, the underperformance of Europe ex-UK – lagging global markets – presents an opportunity. Europe offers exposure to a diverse set of AI adopters across industrials, financials, consumer sectors and healthcare. As the equity rally broadens, these sectors could play catch-up.

This rotation – from outperformers to laggards and from concentration to diversification – is a hallmark of maturing market cycles.

To be clear, this is not a call to abandon equities. On the contrary, we maintain an Overweight stance on the asset class, supported by solid earnings growth and still-attractive upside potential. The US market, in particular, remains Overweight, given its leadership in innovation and AI development. The UK, by contrast, remains less compelling, given weaker structural drivers. Thus, maintaining diversified core allocations across AxJ, Japan and Europe ex-UK would allow investors to capture the benefits of a more inclusive rally.

Of course, risks remain. Geopolitical tensions, particularly in the Middle East, could disrupt energy markets. Both Europe and AxJ, as energy importers, are vulnerable to oil price spikes. However, our base case does not assume a prolonged conflict, and we expect oil prices to trend lower over the next 12 months. This provides a more benign backdrop for global growth and corporate profitability.

Strategising for a mature market cycle

The key takeaway is that the equity rally is not ending; it is evolving.

Investors who recognise this shift early stand to benefit. The trade that worked in the past – concentrated exposure to a handful of technology enablers – has run much of its course. The opportunity now lies in broadening exposure across sectors, regions and stages of the AI value chain. This requires a more nuanced, selective approach, but it also opens up a wider set of return opportunities.

In investing, cycles rarely end abruptly; they transition. The move from concentration to diversification is one such transition. It signals not weakness, but maturity, and for those willing to adapt, it offers the prospect of sustained and more balanced returns in the next phase of the market cycle.