1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 129
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
United States
Nav Malik
Director, Equities Research
Lead
Muhammad Tayyab
Senior Manager, Equities
Key conclusions
•
Fed easing should support equities, albeit market reaction will hinge on the pace and
context of rate cuts.
•
Mid-term election years typically exhibit higher volatility and lower returns versus
presidential and non-election years.
•
Accelerating earnings growth should drive performance in 2026, although elevated
valuation multiples may limit upside and heighten volatility if policy or earnings deviate
from expectations.
We continue to have a favourable view on U.S. equities, with accelerating and broadening
earnings growth likely driving performance in 2026. We expect earnings growth will be the key
driver of U.S. equity performance, with S&P 500 earnings forecast to grow by 13.7% in 2026,
building on a solid 10.5% rise in 2025 and significantly above the long-term historical average.
Importantly, earnings growth is broadening beyond the large cap Magnificent 7 stocks that
dominated 2025.
The Technology sector likely remains the primary driver of growth in 2026. Key players continue
to invest heavily in AI to protect their dominance amid rapid technological change, which has given
rise to intensified competition. AI-linked capex by hyperscalers is projected to reach roughly $500
billion in 2026, more than doubling since 2024 and underscoring the structural shift toward cloud
and compute dominance. This structural shift is also highlighted by the significant step-up in
capital intensity for the top 10 index constituents, largely comprised of hyperscalers and megacap internet companies with outsized exposure to the digital economy. The spending is likely to
persist and drive earnings growth until clear winners emerge and the market reaches a more
normalized level of competition. In the interim, elevated capital expenditures may pressure
margins and compress ROIC, a narrative that could gain more traction if growth is lacklustre. Other
sectors, specifically those that enable large-scale buildouts without requiring similarly high levels
of capex, may also incrementally benefit during this period. Examples include infrastructure,
utilities, construction, and capital goods.
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