We maintain a constructive outlook for equities, with a broadening of opportunities for selective investment, backed by disciplined diversification.
Today’s mix of policy easing, supportive fundamental backdrop, and transformative AI investments sets a constructive outlook for equity markets in 2026. Economic growth is steady, and central banks stand poised for further rate cuts as inflation moderates. The continued build out of the artificial intelligence (AI) supply chain is driving momentum across a broadening set of beneficiaries. Additionally, fiscal expansion in Europe and structural changes in Japan stand to buoy earnings growth from a global perspective. Despite this broad-based optimism, we remain cognisant of potential risks and view diversification as essential, particularly as a broader set of opportunities emerges.
Earnings’ prospects drive positive outlook
US company earnings will likely be a key driver of equity returns in 2026. Our expectations are for robust growth with the likelihood of upside surprises exceeding the potential for disappointment. Our base case is for high single-digit gains with scope for low double-digits at the upper end of our forecasts.
Several factors contribute to our positive assessment:
- Companies appear to have adjusted well to the new environment of higher tariffs and resulting cost shifts with redesign, alternative sourcing and selective pricing curbing earnings headwinds to an estimated 3-5% range. Gross margins could surprise positively if inflation remains contained.
- The AI-driven capital expenditure cycle persists as a potent force, and we expect it to be stimulative for revenues across a broadening range of sectors.
- Additionally, interest rates trending lower and inventory buildouts should support earnings recovery in sectors of the economy that have been operating in challenging conditions in recent years. As this occurs, more opportunities will emerge.
We view these trends as supportive of investors’ equity allocations.
Diversification matters – for offence and defence
Diversification always matters, but we view it as a crucial consideration in 2026. We expect continued strength in the US, but opportunities are evolving from the era of US exceptionalism. Post the Global Financial Crisis (GFC) earnings growth in the US (fuelled largely by the technology sector) outstripped the rest of the world. In the years since the pandemic however, the gap has narrowed significantly (Figure 1). We anticipate that pockets of earnings growth in Europe and Japan will keep pace with the US, and a broader range of sectors look capable of delivering appreciation. Defence and financials are two notable examples. From a market capitalisation perspective, we also see firmer support for small cap stocks. The path of interest rates will be stimulative for companies more closely geared to the economic cycle.
Figure 1: Earnings per share (EPS) growth broadening out
Blended 24-month forward EPS growth on a weekly basis. Post-GFC (left) vs Post-pandemic (right)
Source: Columbia Threadneedle Investments, Bloomberg as of October 31, 2025.
When constructing and monitoring portfolios, we contend that investors should also be wary of hidden concentrations – especially as the AI investment cycle diffuses across a host of industries. Traditional risk models may under-diagnose this trend so investors should think carefully and monitor portfolio balance. At the same time, investors should consider diversifying into areas of the market that were previously out of favour but are once again beginning to generate meaningful earnings growth. For example, we see select opportunities in areas like life insurance. In addition to generating attractive returns, these broader opportunities can provide an effective counterweight to AI-related thematics. The ‘two markets’ construct should remain at the fore of investor thinking from here.
Global lens – a world of opportunity
April 2025’s tariff announcements prompted a reassessment of geographic exposures and resulting shifts in capital allocations. In 2026, that trend should continue.
Europe to accelerate as brakes eased
The prospect of fiscal expansion stoked the fires of interest in European equities during 2025. In 2026 we see this potential being realised. The relaxation of Germany’s debt brake and associated defence and infrastructure spending are set to unlock growth, and lower interest rates also lend support (especially for the periphery states where the region’s prevailing rates are effectively too low). We expect a broadening of performance across sectors and industries, including into areas like financials and industrials. At the same time, we are mindful of risks, especially in countries like France, where political uncertainties cast doubt on economic discipline and the sustainability of high debt levels. In summary, opportunities abound but investors should be attentive to broader developments.
Japan’s ongoing transformation
Japan’s economic transformation continues with deflation firmly in the rearview mirror –inflation stands at around 2% and bond yields are above the 3% mark. Ongoing reforms support a more favourable growth environment, and corporate Japan is streamlining balance sheets, embracing a new focus on returns on equity, and investing capital. As with many other developed economies, demographic challenges persist, but for selective investors there are plenty of attractive stock-specific opportunities.
AI capex propels broader impact
The AI-fuelled capital expenditure (capex) cycle could reach an extraordinary $3.5 trillion through to 2030, primarily through the build-out of data centres and related infrastructure. We view the magnitude of this investment cycle as transformative, with its impact reaching far beyond technology companies as it generates powerful tailwinds for the global economy.
In the US, AI capex currently contributes more to GDP growth than traditional consumption. Demand is surging across sectors such as semiconductors, industrial equipment, materials, and utilities as investment in AI and AI data centres grows exponentially, driving rising demand for power and water. There are even positive potential impacts for select consumer-facing businesses in locations experiencing concentrated AI-related construction.
Figure 2. AI capex boom
Spending projected to reach $3.5 trillion
Source: Columbia Threadneedle Investments, October 2025.
Over the next 12-18 months we expect to gain deeper insight into how firms are monetising AI within their operations. Through granular metrics we aim to assess how management teams are creating or maintaining competitive advantage: How are they innovating product faster than their peers and how are efficiencies impacting future earnings?
Amid all the AI-related optimism it is crucial to remain mindful of associated risks. Valuations are elevated, but with interest rates falling and earnings growth both broadening and accelerating into 2026 it is unlikely we will see a significant correction in valuations. Indeed, the surprise may be that these conditions enable valuations to expand further.
Mindful of medium-term risks
Our six- to 12-month view on equities is constructive, but we are mindful that geopolitics could trigger volatility. Additionally, companies that have invested heavily on AI-related capex will have to start demonstrating a return on that outlay and bumps along the road towards monetising AI are likely. Beyond that, medium-term risks are building. Concerns around levels of government debt rank high on our watch list, particularly in the US and parts of Europe where political fragmentation and fiscal discipline issues are unresolved. Interest payments place a strain on public finances and higher bond yields could trigger a negative reaction in equity markets. We also see structural challenges in demographic trends as ageing populations in many developed economies constrain long-term growth potential and alter savings and investment patterns.
The bottom line
We believe that conditions are in place for further appreciation in equity markets in 2026. Growth is sound and interest rates look set on a downward trajectory. These factors, together with increased investment in AI and a broader recovery in corporate profitability, are driving positive momentum. In this environment, we advocate for selective investment and assert that considered diversification is essential. Through intense research, our focus remains on building resilient portfolios to help clients reach their investment outcomes.
