When we set out our view in January, the question was whether 2026 would prove an exceptional year for investors or the start of another bubble. The strong start to equity markets until the end of February got disrupted by the Iran war, which caused a sharp yet short-lived correction in March.
At the half-way point the balance has tilted toward the former: equities advanced strongly from early April, the economic data remained resilient, and the AI investment cycle continued without interruption. After that advance we reduced our equity overweight in June and realised some profit. Such a run also argues for a degree of caution: some consolidation over the coming months looks both likely and healthy, and trimming into strength is the natural way to prepare for it. The reduction was modest, however, and our stance remains constructive: we are positive on equities over the next six to twelve months and stay slightly overweight. The case for owning risk is intact; we are simply doing so with a little more discipline than at the peak in early June.
1. Constructive on equities, with profits partly taken
The market environment remains favourable, and the economic outlook is sound, and that, rather than sentiment, is what keeps us overweight equities. Following the spring’s strong advance, it was prudent to realise some of the gains, so we trimmed the overweight in early June. The resulting allocation is deliberately measured: positive over a six-to-twelve-month horizon and fully engaged in the prevailing long-term uptrend but holding more flexibility than before. We continue to prefer equities to fixed income, by a clear but moderate margin.
2. A supportive backdrop: improving growth, resilient earnings
The fundamentals, not market sentiment, are doing most of the work. The macro backdrop has improved: the manufacturing sector is recovering, and the broader US picture has turned more positive. First-quarter earnings were strong, led by AI-related themes, and earnings-revision ratios remain well above their long-run averages, leading to analysts raising estimates on a broad base. Combined with a robust capital-expenditure cycle and easing geopolitical risk, including a US–Iran agreement that has lowered tensions and energy prices, the constructive case appears intact rather than exhausted. With no clear end to the AI investment cycle, the drivers of a continued bull market trend that took off in late 2022 remain in place.
3. Regional equity allocation: overweight emerging markets, underweight Europe
Our regional preferences within equities have shifted. We moved to an overweight in emerging markets in late 2025, supported by substantial technology hardware demand, still moderate valuations and a relatively strong price trend, which offered exposure to the AI theme at a more reasonable price. This allocation has worked out well, as emerging market equities had gained 27 percent in euros this year as of 15 June, double the return in the All-Country World index. In May, we moved to an underweight in Europe, where growth forecasts have been revised down more sharply than elsewhere and earnings growth remained weak in the early part of the year. The United States stays neutral as an anchor and the centre of the AI theme.
4. Fixed income allocation: overweight high yield, underweight government bonds
Our fixed-income positioning reflects a preference for credit risk over interest-rate risk. We remain overweight high yield: a sound economy, healthy corporate fundamentals, and a constructive earnings backdrop are supportive of corporate credit, and the yield level is still attractive. We remain underweight government bonds, where the risk is asymmetric – should a strong economy and persistent inflation push long-term yields higher, duration would be the least desirable exposure to hold. In short, we are willing to pay for credit risk and reluctant to take on interest-rate risk.
5. The principal risks
A constructive view is not a complacent one, and three risks warrant attention. The first concerns rates: persistent US inflation alongside a strong economy could lift the 10-year yield above five percent, a level that has historically weighed on equities and particularly on the higher-multiple growth names that have led the market. The second, closely related risk is that central banks adopt a more hawkish stance should inflation prove sticky. The third is the AI cycle itself: an unexpected reversal would be the most significant threat to the current trend, and the onset of a mega-IPO season presents a near-term test, as the market is asked to absorb three very large listings at an estimated combined value of $4 trillion. The ease with which it does so will be a meaningful signal of investors' appetite for risk.
At the mid-point of the year it is worth taking stock without stepping away from the market. We realised part of the spring’s gains, but the conditions we favour remain in place: a recovering economy, broadening earnings, and an AI cycle with further to run. As we noted in January, the more useful posture is curiosity rather than caution for its own sake and at present that favours emerging markets over Europe, credit over duration, and a portfolio carrying enough balance to withstand the risks still ahead.
Historical returns are no guarantee of future returns. The value of an investment may rise and fall and the investor may lose some or all of the capital invested. The contents of this article should not be considered as investment advice and should not be relied upon in making an investment decision.
