Beyond the Magnificent Seven: The Countries Set to Deliver Outsized Returns in 2025-2026.

 

 

Global Equity Outlook 2025-2026: The New Leaders of High-Flying Stocks

The investment landscape for the end of 2025 and the first half of 2026 is defined by a significant rotation in market leadership. While the United States remains central to the Artificial Intelligence (AI) supercycle, a confluence of factors—including a more dovish U.S. Federal Reserve, easing inflationary pressures, attractive valuations, and structural corporate reforms abroad—is expected to broaden the market's gains, shifting the focus towards Emerging Markets (EM) and select Developed Markets (DM) outside the U.S.

The theme of U.S. exceptionalism in earnings growth is anticipated to narrow, setting the stage for international equities to outperform the S&P 500 in 2026. This comprehensive outlook details the country-specific drivers and "high-flying" sectors likely to lead returns through the mid-point of 2026.

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I. United States: AI Supercycle Broadens & Value Rebounds

The U.S. equity market, particularly the S&P 500, is projected to maintain a positive trajectory through 2026, driven fundamentally by the continued AI-driven capital expenditure boom and favorable policy tailwinds from tax incentives and deregulation. However, the gains are expected to become less concentrated than in 2024 and 2025.

Key Drivers:

• AI Supercycle: The core driver remains the immense investment in AI infrastructure, with above-trend earnings growth (estimated at 13–15%) expected for the next two years, largely driven by the mega-cap tech cohort.¹
• Fed Easing: Anticipated interest rate cuts by the Federal Reserve are expected to lower the discount rate on future earnings and stimulate broader economic activity, especially in rate-sensitive sectors.²
• Policy Support: The current U.S. policy environment is seen as growth-positive, promoting capital spending and potentially reducing corporate tax liabilities.³

High-Flying Sectors & Stocks (2025 H2 - 2026 H1):

Sector	Theme & Rationale	High-Flying Stock Focus (Examples)
Technology / AI Infrastructure	Continued demand for chips, data centers, and cloud services. Focus shifts from simple hardware to AI-driven monetization and application.	Semiconductor Leaders (AI-specific hardware), Cloud Providers (for AI platforms), and Cybersecurity (protecting the sprawling AI ecosystem).
Industrials	Benefiting from the national focus on reshoring, infrastructure spending, and the physical build-out required for AI data centers and energy transition.	Defense Champions (supported by geopolitical spending) and Heavy Equipment/Automation firms.
Financials	A steeper yield curve (longer-term yields rising more than short-term) and improved credit impulse, combined with potentially higher M&A activity, support this sector.	Large-Cap Banks and Specialized Credit firms.
Healthcare	Defensive growth with structural demand from an aging population and continued innovation in biotech and medical devices.	Biotech Innovators and Large-Cap Pharmaceutical companies.

Crucial Headwind: Despite the bullish outlook, the high concentration risk in U.S. mega-cap stocks and a domestic labor market that is showing signs of softening consumption could create volatility.

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II. Asia & Developed Ex-U.S.: The Structural Reform Story

The developed markets outside of the U.S., particularly in Asia, are poised for potentially higher relative returns, driven by structural reforms, attractive valuations, and the broadening of the AI theme.

1. Japan: Corporate Reform & Deflation's End

Japan's market is in a major bullish structure, supported by domestic flows and a cultural shift in corporate governance.

• Key Drivers:
• "Sanaenomics" & Reform: New economic policies are expected to propel Japanese equities, focusing on unlocking excess corporate cash, boosting shareholder returns (buybacks and dividends), and stimulating domestic middle-class spending.⁴
• Inflation & Rates: The end of the negative interest rate policy and accelerating real wage growth are driving genuine reflation, which benefits banks and domestic cyclical stocks.
• High-Flying Sectors:
• Financials: Banks benefit directly from higher interest rates and a steeper yield curve.
• Value/Domestic Cyclicals: Retail, travel, and real estate, powered by domestic reflation and fiscal spending.
• Technology/Automation: Global leaders in factory automation, robotics, and specialized semiconductor equipment (a key link in the AI supply chain).

2. Eurozone (Europe): Fiscal Boost & Value Play

The Eurozone is expected to improve momentum in 2026, with earnings growth forecasted to match the S&P 500, benefiting from deeply discounted valuations relative to the U.S.⁵

• Key Drivers:
• Credit Impulse: The European Central Bank's substantial interest rate cuts in 2024-2025 are expected to fully filter through, driving a rebound in credit growth.
• Fiscal Stimulus: Significant fiscal announcements, notably in Germany and broader European defense and infrastructure spending (projected at 5% of GDP in some countries), will benefit domestic companies.⁶
• Valuation: European stocks offer a deep valuation discount compared to U.S. peers, making them attractive to global capital.
• High-Flying Sectors:
• Domestic Cyclicals/Small-Mid-Caps: Companies focused on domestic trends, infrastructure, and defense/security spending.
• Industrials: Benefiting from the massive defense and infrastructure build-out.
• Banks/Financials: Supported by the end of negative rates, leading to healthier margins.

3. South Korea & Taiwan: The AI Hardware Backbone

These markets will continue to be critical components of the global AI supply chain, acting as the manufacturing and memory backbone.

• Key Drivers: Governance reforms in South Korea and the sustained demand for cutting-edge technology from global AI leaders.⁷
• High-Flying Sectors: Semiconductors (memory and logic chips) and Technology Hardware.

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III. Emerging Markets (EM): The Outperformance Thesis

Emerging Markets are widely projected to deliver outsized returns in 2026, driven by a powerful trifecta: a weaker U.S. Dollar, lower local interest rates, and superior economic growth.⁸

• Key Macro Tailwinds:
• Weaker USD: The expected depreciation of the U.S. Dollar makes dollar-denominated EM debt easier to service and typically triggers capital flows into EM assets.⁹
• Local Rate Cuts: Rate cuts by the U.S. Fed allow EM central banks to continue their own easing cycles, stimulating domestic demand.¹⁰
• Valuation Advantage: EM equities remain significantly cheaper than developed market stocks, offering a compelling entry point.

High-Flying Markets (2025 H2 - 2026 H1):

Country/Region	Primary Theme & Sector Focus	Rationale
India	Structural Growth & Domestic Consumption	India continues to lead in long-term earnings growth forecasts. Focus on Financials, Industrials, and Infrastructure as government reforms and a young, growing middle class drive demand.
Brazil / Latin America	Monetary Policy Stimulus & Reform	Strong upside potential driven by significant monetary policy stimulus and key political/reform shifts. Focus on Commodities, Financials, and Domestic Consumer names.
China / Hong Kong	Green Shoots & Stabilization	While facing structural headwinds (property), China’s core CPI is stabilizing, and policy efforts are easing the property downturn. A potential break above key resistance levels in the Hang Seng Index could signal an extended uptrend. Focus on Technology (Offshore), and Industrials.
Emerging Technology (Korea, Taiwan)	AI Integration & Supply Chain	These markets benefit from the broadening of the AI theme, supplying essential components (chips, displays, etc.) for the next wave of AI-driven devices and infrastructure.

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IV. Global Investment Themes Beyond Country Lines

While country-specific fundamentals are crucial, two global thematic forces will drive the performance of "high-flying" stocks irrespective of their domicile:

A. The Physical AI Build-out (Capital Expenditures)

The next phase of the AI supercycle shifts focus from pure software/cloud to physical infrastructure.¹¹

• Data Center Power: The immense power requirements of AI data centers will drive high-flying stocks in power generation, transmission, and utility-scale battery storage.
• Networking & Connectivity: Companies specializing in the fiber optic cabling, routers, and networking equipment necessary to connect massive AI clusters will see sustained demand.
• Precision Manufacturing: Firms involved in the high-end cooling solutions and specialized manufacturing tools for advanced chips will continue to be indispensable.

B. Defense, Infrastructure & Energy Transition (Fiscal Tailwinds)

Government-driven spending on strategic priorities will fuel specific sectors.

• Defense & Security: Heightened global geopolitical conflict and increased defense spending budgets across the U.S. and Europe will benefit defense contractors.
• Electrification & Grids: The transition to cleaner energy and the need to overhaul aging power grids (driven by the demands of electric vehicles and data centers) will support electrical equipment manufacturers and engineering firms.¹²

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V. Key Risks to the Outlook (2025-2026)

The primary risks to this bullish outlook for 2025 H2 to 2026 H1 stem from potential setbacks in the global policy and macro environment.

1.     Geopolitical/Trade Escalation: The risk of intensified global trade protectionism, particularly involving U.S.-China tariffs and sanctions on key products like semiconductors, could disrupt supply chains, reignite inflation, and depress global growth.

2.     U.S. Inflation Stickiness: If U.S. inflation proves more persistent than anticipated, it could lead the Fed to delay or reverse rate cuts, strengthening the U.S. Dollar and choking off the capital flows expected to benefit Emerging Markets and international value stocks.

3.     Valuation Correction in AI: A sudden and sharp repricing of the highly valued AI mega-cap stocks (a potential "bubble burst") could trigger a broader financial market correction, threatening macrofinancial stability globally.

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Conclusion

The end of 2025 and the first half of 2026 are positioned for a significant global rebalancing of equity market performance. While U.S. stocks will continue to benefit from the AI-driven tech core, the "high-flying" returns are increasingly expected to be found in Developed Markets ex-U.S. (Japan and Eurozone) and Emerging Markets (India, Brazil, Korea). Investors are shifting focus to countries undergoing structural change, benefiting from lower rates, and offering compelling value outside of the concentrated U.S. technology sector.

 

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