Equities remain underpinned by solid earnings, but face potential risks from rising macro volatility, geopolitical uncertainties, and seasonality ahead of the US mid-term elections. Despite potential volatility in the near-term, we maintain a balanced outlook with a modest pro-risk tilt.

Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore

Investors are navigating a complex and structural shift in the outlook for interest rates and long-term borrowing costs. Long-end bond yields have been gradually rising as massive capital requirements for AI infrastructure compete with governments and corporates for funding. Meanwhile, short-term rates remain in focus following Fed Chair Kevin Warsh's hawkish remarks at Jackson Hole, where he reiterated that further rate hikes remain possible if inflation does not move sustainably toward the Fed's 2% target.

In the months ahead, markets are likely to be caught between resilient economic growth and strong corporate earnings on one hand, and a less predictable monetary policy path coupled with higher long-term yields on the other. These factors could weigh on both bond returns and equity valuations. Investors should look beyond near-term volatility and focus on building diversified portfolios that balance growth, quality and income, while retaining flexibility to respond to shifts in market expectations.

We maintain a moderately constructive view on equities, supported by our confidence in the ongoing technology investment cycle. Regionally, we are Overweight the US, Neutral on Japan and Asia ex-Japan, and Underweight Europe. Within Asia ex-Japan, we favour China, Hong Kong, Taiwan and Singapore.

At the sector level, our preferred exposures remain Information Technology, Communication Services, Healthcare and Materials. From a style perspective, we favour a barbell approach combining Quality Growth and Low Volatility stocks.

US – Looking through the rise in yields

As the 2Q2026 earnings season draws to a close, consensus FY2026 earnings per share (EPS) growth estimates for the S&P 500 have been revised up from about 25% a month ago to 33%, supported by continued improvements in earnings revision breadth. While hyperscalers and AI infrastructure beneficiaries were key drivers of earnings growth during the quarter, strength was also broadly distributed across other sectors.

We remain mindful of the upward pressure on bond yields, as a sharp or disorderly rise could threaten the equity rally. That said, we cannot rule out the possibility of the US Treasury taking steps to cap long-term yields, which could provide a significant boost to US equities.

Technology remains a core conviction. Recent developments have reinforced our positive view, with hyperscalers demonstrating a clearer path to generating returns on their capital expenditure investments. Consistent with Jevons paradox, improvements in AI efficiency and falling costs may encourage broader adoption, ultimately increasing overall demand for AI services and infrastructure.

Europe – Useful in the balancing of an AI-heavy portfolio

European equities have benefited from investor rotation away from technology-heavy markets, supported by their limited exposure to mega-cap technology stocks and more value-oriented sector composition. While we remain cautious on Europe due to stagflation risks, geopolitical uncertainties and longer-term structural challenges, we believe the region continues to play an important role in global portfolios.

The composition of European equity markets provides a natural diversification benefit, with significant exposure to financials, industrials, materials and consumer staples. Europe is also home to many high-quality global leaders that generate substantial revenues outside the region. In addition, its relatively attractive dividend yields can help cushion portfolios during periods of market volatility.

We therefore view Europe less as a source of structural growth and more as a source of diversification and income within a global equity allocation. Within the region, we continue to favour companies with strong fundamentals, pricing power and resilient earnings.

Japan – Solid earnings growth

Japanese equities have slightly lagged global markets since the coordinated US-Japan currency intervention in late July. Looking ahead, investor focus will be on the Extraordinary Diet Session, where a proposed consumption tax cut estimated at around 0.8% of GDP will be debated, as well as the upcoming Bank of Japan (BOJ) policy meeting. Markets are currently pricing in a high probability of a rate hike.

Corporate earnings remain supportive. TOPIX companies delivered strong 1QFY2027 (April-June 2026) results, with revenue and recurring profit rising 15% and 51% year-on-year, respectively. Earnings growth has broadened beyond AI-related sectors, with non-manufacturing industries reporting a healthy 27% increase in recurring profits. Around 17% of companies raised their profit guidance, led primarily by AI-linked sectors such as electrical equipment and machinery.

While currency intervention may weigh on export-driven sectors and high-momentum cyclicals, we believe structural growth themes supported by strong fundamentals will remain the key drivers of performance. We continue to favour companies exposed to Japan's long-term investment priorities, including the 17 strategic industries identified by the Takaichi administration.

Asia ex-Japan – Importance of selectivity amid rising concentration

The MSCI Asia ex-Japan Index has become increasingly concentrated, with what was once a diversified representation of emerging Asian economies now more closely tied to the global technology cycle. Despite having nearly twice as many constituents as the MSCI US Index (996 versus 527 as of end-July 2026), concentration levels are higher. The top 10 holdings account for 42% of the index, compared with 37% for both the MSCI US Index and the S&P 500, with technology-related companies making up around 40% of that weighting.

In this environment, active market and stock selection become increasingly important for identifying opportunities and managing concentration risk.

Within the region, we continue to favour China, Hong Kong, Taiwan and Singapore.

China/HK – Diverging performance

In line with our expectation that offshore China equities would catch up with onshore markets, they have outperformed in USD terms over the past month, driven primarily by the Healthcare and Materials sectors.

The 2Q2026 earnings season has seen encouraging upward earnings revisions across both offshore and onshore markets, particularly in the Healthcare and Information Technology sectors, highlighting China's strengthening innovation capabilities. However, index-heavy internet and platform companies have yet to deliver meaningful earnings upgrades amid concerns over rising capital expenditure. Earnings revisions have remained modest, with only limited improvement in profitability within food delivery and quick-commerce businesses.

Looking ahead, we continue to favour the onshore A-share market, supported by stronger earnings growth, broader exposure to industrial, technology and services sectors, and lower sensitivity to global volatility arising from higher US bond yields.

President Xi Jinping’s reported state visit to the US in September, could represent another important milestone following the US-China Presidential Summit in May.

Singapore – Readying Singapore for the next 50 years

In his National Day Rally 2026 speech, Prime Minister Lawrence Wong unveiled several major infrastructure and development initiatives aimed at supporting Singapore's growth over the next 50 years. These long-term projects are expected to require substantial investment and create opportunities across multiple sectors.

Key beneficiaries are likely to include infrastructure, construction, utilities and power companies, while related initiatives should also support tourism, hospitality, aviation, entertainment, food and beverage, and transport businesses. Financial institutions may benefit from stronger credit demand as investment activity accelerates.

Given the positive implications of these initiatives and the significant investments planned to strengthen Singapore's long-term growth prospects, we maintain our Overweight view on Singapore equities.

Global Sectors –Tech earnings point to resilient AI fundamentals

While the AI trade has experienced periods of volatility and rotation away from previous market leaders, we believe the long-term structural investment case remains intact. The AI landscape continues to evolve broadly as expected under our proprietary CHIP-EP framework. As the industry transitions into Phase 3, "Enabled Revenue", competition among large language models (LLMs) is intensifying as purpose-built models gain traction, contributing to declining token prices.

Despite this, we expect the build-out of AI infrastructure to continue, supported by growing demand for inference computing. The 2Q2026 earnings season has reinforced this view, highlighting a growing backlog of compute demand, rising AI-related capital expenditure and continued earnings outperformance across the sector.

We also see tactical opportunities in semiconductor stocks and leading internet platforms. Historically, 20% corrections in the Philadelphia Semiconductor Index, including the current pullback, have often presented attractive entry points. At the same time, valuations of major internet companies and hyperscalers have retreated to support levels that have remained intact for more than a decade.