Earning it

With the S&P 500 close to all-time highs, debate continues over whether the rally reflects strong fundamentals or excessive enthusiasm. Our view is that the rally has been earned, with robust profit growth providing the foundation for the advance. First-quarter S&P 500 earnings growth was the strongest in four years, reflecting still-healthy economic activity, continued AI-related investment, and improving earnings in some more cyclical areas of the market. We expect second-quarter earnings growth to be even higher.

Still, investors will need to continually reassess the evolution of the AI growth story as they consider the sustainability of current earnings, particularly with the beneficiaries of AI adoption likely to keep shifting over time—from semiconductors and infrastructure toward energy, applications, and companies that can translate the technology into productivity gains. 

In our view, the next stage of the market cycle is unlikely to be defined by a single source of return, but by a wider group of companies and regions delivering earnings growth. And we note that recently, cyclical sectors—such as financials—and defensive laggards like health care have outperformed tech. 

Overall, we see around 10% upside for global stocks (MSCI All Country World Index) through mid-2027 and believe investors should broaden exposure across regions to capture a wider range of opportunities and growth drivers, and to manage single-stock risks. We upgrade European equities to Attractive and continue to like US and Asian equities. We forecast 2026 earnings growth of 21% for global equities, followed by another solid year in 2027. 

Risks to the rally include renewed fears of central bank rate hikes if energy prices rise further or inflation proves sticky. AI capex or monetization trends could fall short of investors’ expectations. The path toward a lasting peace between the US and Iran is proving bumpy. And wide gaps between individual stock performance mean concentration risks are elevated, particularly for portfolios with large exposures to a small number of companies, a single region, or a single theme. 

We believe this reinforces the case for a diversified core portfolio, including global equity diversification, targeted allocations to long-term innovation themes, and exposure to quality bonds, commodities, and alternatives. We also favor enhancing portfolio income through diversified fixed income strategies, including exposure to emerging market and high yield credit.