Outlook Stock market outlook: 3 themes for the second half of 2026

If you take your cues from the daily news headlines, you can find any number of reasons to feel squeamish about the stock market.

Those feelings may be misplaced, however. Thus far in 2026, stock markets have reached a series of new highs amid wars in the Middle East and Ukraine, fluctuating oil prices and elevated inflation. Why have stock markets shown such strength? It largely comes down to a simple yet critical factor: corporate earnings are on a tear.

The artificial intelligence juggernaut accounts for much of the good news. Aggressive spending by technology companies has translated into revenue and earnings growth for companies across sectors. But there is much more to the story than AI growth. Banks are capitalising on higher interest rates, innovative therapies are driving sales growth in healthcare and higher crude oil prices are pumping up energy companies. Looking forward, consensus earnings estimates reflect continued strength, particularly in emerging markets, where they are expected to soar 49.2% by year’s end.

“When I look at the market going forward, the key element is this underpinning of strong corporate earnings,” says equity portfolio manager Rob Lovelace. “This growth has been evident for the last three years, and it doesn’t look like it’s slowing down.”

Here are three equity market themes we are focused on for the remainder of the year and beyond.

1) The AI freight train shows no signs of slowing

In the race for AI supremacy, five hyperscalers — Amazon, Alphabet, Meta Microsoft and Oracle — have committed to investing $650 billion this year on data centres, a historic level of spending that does not appear to be slowing. “These investments are being led by some of the most profitable companies the world has seen,” says equity portfolio manager Mark Casey. “As long as the technology keeps advancing, I expect they’ll continue to invest.”

Indeed, total global investment in AI infrastructure and AI related products could reach $30 trillion over the next decade, eclipsing China’s industrial boom of the early 2000s, considered by many to be the largest in modern history. That boom reshaped global trade, labour markets and politics, suggesting AI may be much bigger than a sector story.

“In the first half of the year, the Iran war seemed to block out the sun,” Casey says. “But I think AI still is the sun in the sense that it is potentially the highest impact technology in a generation and the most significant force in the economy.”

All the spending has translated into soaring demand for advanced semiconductor makers like NVIDIA and Broadcom as well as semiconductor foundries like Taiwan Semiconductor Manufacturing Company (TSMC) and networking companies like Cisco Systems, for example.

With technology advancing so rapidly and the build-out likely stretching years into the future, the epicentre of demand could shift among various hardware suppliers. That is why selective investing is essential, Casey adds.

2) Look beyond US borders for magnificence

Think the AI story is the exclusive domain of US tech giants? Think again.

Just as the Magnificent Seven have led US markets, seven companies that play a key role in the AI revolution are also dominating emerging markets. TSMC, Samsung Electronics and SK hynix are common names, but lesser-known companies MediaTek and Delta Electronics are also asserting leadership. Tencent and Alibaba have access to the largest market in the world by operating in China. 

These seven tech and platform companies are the largest by market capitalisation in the MSCI Emerging Markets Index, making up 33% of the index. At Capital, we refer to them as the “Emergent” Seven. They generally have smaller market capitalisations and lower valuations than many of their US counterparts — and are generating earnings growth expectations beyond those for the US market.

Investors focused on US equities may not fully grasp the scope of these opportunities. “Now many global leaders in their industries can be found outside the United States,” says equity portfolio manager Steve Watson.

More broadly, a powerful rally in emerging and developed ex-US markets that started in 2025 continues, driven by attractive valuations, a weak dollar and strong corporate earnings. Although US stocks have narrowed the gap, Watson expects further opportunity in non-US markets, citing as examples industry leaders like Airbus, ASML, AstraZeneca and Safran as headquartered beyond US borders.

3) The physical economy is flexing its muscles

While AI may be the biggest driver of stock markets — after all, NVIDIA’s market capitalisation alone has grown larger than three entire S&P 500 Index sectors — ignoring companies in the physical economy could be a mistake.

To begin with, AI cannot run without the physical economy. Demand for steel, copper, heavy construction services and power generation equipment is soaring in support of the data centre build-out. For instance, sales in Caterpillar’s construction division jumped 38% in the first quarter. The company also reported an order backlog of $62.7 billion for power generation equipment.

“Pick-and-shovel companies, both the semiconductor supply chain and the infrastructure developers, are where I see the clearest opportunity,” says equity portfolio manager Chris Buchbinder.

Others are attractive because they are unlikely to be disrupted by AI. “Consider, for example, Royal Caribbean. I don’t see AI replacing cruise ships,” Buchbinder explains. Another example is jet engine maker GE Aerospace, which entered the year with a $190 billion order backlog, driven by rising global demand for travel and greater defence spending.

In addition, investors concerned about rising risks may want to consider investing in some physical economy companies with income potential that pay dividends as well. Many drugmakers, for example, generate healthy free cash flow that allows them to return capital to shareholders through dividends while strengthening their pipelines through targeted acquisitions. Pharmaceutical company AstraZeneca has a well-established range of oncology franchises. To drive future growth potential, it has assets targeting heart disease, chronic kidney conditions and metabolic disorders.

The bottom line for investors

To be sure, investors are confronted with risks heading into the back half of the year. Not the least of them are soaring energy prices, elevated inflation and high valuations in certain sectors. But every year offers its own unique mix of risks and opportunities. Indeed, the market volatility immediately after the start of the Iran War in late February is an important reminder that maintaining well-diversified, balanced portfolios is crucial in any market environment.