We maintain a constructive stance on equities in 2026 with an Overweight position in Asia ex-Japan given the region’s more favourable risk-reward relative to global peers, but caution that downside risks remain.

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

2025 was a good year for equities. Heading into 2026, earnings expectations and valuations are at the higher end of historical ranges especially for the US. That said, the backdrop for equities remains relatively benign with a broad-based easing cycle by major central banks except for a few such as the Bank of Japan (BOJ).

This reflects a broader shift towards supporting growth and should contribute to improved sentiment. Market concentration is likely to remain elevated in Quality Growth, but if AI expectations disappoint, it could spark a reversal in concentration, favouring a rotation into Low Volatility instead.

Overall, we maintain our Overweight position for equities, led by Asia ex- Japan given the region’s more favourable risk-reward profile, but downside risks remain amid ongoing geopolitical tensions and uncertainties relating to earnings growth due to the impact from tariffs. Meanwhile, potential Federal Reserve (Fed) rate cuts could result in easing of financial and liquidity conditions as well as a weakening of the US Dollar, benefitting Asia ex-Japan equities.

Within the region, we prefer China/Hong Kong, Singapore and Malaysia equities. In terms of global sector preferences, we favour the IT, Communication Services, Materials and Utilities sectors going into 2026.

US – High bar set for 2026 earnings

The S&P 500 Index delivered a stellar set of earnings in the first nine months of 2025, continuing its streak of beating consensus estimates since 2023. Although its price-to-earnings (P/E) ratio is trading at more than 2 standard deviations above its historical average, this is supported by the resumption of rate cuts in a non-recessionary environment, a seemingly insatiable AI boom, and the willingness of the US and China to seek a resolution to trade tensions.

While the structural tailwinds bode well for US equities, we think the high consensus earnings growth of about 14% in 2026 and 2027 sets a high bar to beat. Moreover, there are headwinds that could dampen sentiments ahead.

The sustainability of the AI CAPEX boom is also being questioned, with AI companies becoming increasingly entangled in a circular financing web and debt increasingly being used to fund data centre buildouts. Third, a K-shaped economy is arguably developing with the middle- and lower-income segments lagging.

Given the above, we maintain an overall Neutral positioning on US equities.

Europe – Building capabilities amid shifting tides

European equities are entering a new era in 2026, underpinned by greater fiscal spending and improving domestic growth. At the same time, risks of weaker global demand and the full impact of US tariffs mean that consensus earnings per share (EPS) growth forecast of 12.8% for 2026 (compared to -0.6% in 2025) could be overly aggressive. Political and fiscal uncertainties in certain parts of Europe persist, but all eyes will be on the delivery of its investment promises of re-militarisation and re-industrialisation especially in Germany in which much of the government support embeds a “local sourcing” requirement. Such constraints may lead to timing issues and capacity constraints as the domestic supply chain grows.

Over the longer term, fiscal expansion and infrastructure spending favour sectors exposed to domestic demand, construction and capital goods. Exporters in the meantime could face headwinds from weaker external demand and trade frictions. Given the balanced risk-reward profile, we maintain our Neutral position for European equities in 2026.

Japan – Balancing between favourable fundamentals and near-term risks

Going into 2026, favourable fundamentals are in place, including: (i) the expectation of the Takaichi administration implementing supportive policies, such as proactive fiscal measures in 17 strategic growth areas; (ii) latest quarterly results reinforcing earnings normalisation with consensus estimates forecasting about 8% earnings growth; and (iii) ongoing corporate reforms supporting return-on-equity (ROE) expansion.

However, we caution there could be potential near-term market consolidation with the MSCI Japan Index trading at 17.5x forward P/E, (or close to +1.5 standard deviations above the historical average) and a Nikkei-TOPIX (NT) ratio hovering at a historical high level of 15.5x.

We believe any pullback would offer accumulation opportunities. We prefer investment themes focusing on: (i) AI, technology hardware (especially semiconductors); (ii) defence and energy (such as nuclear); and (iii) domestic demand.

Asia ex-Japan – Riding the wave of growth and forging the future

Although MSCI Asia ex-Japan equities outperformed other key regions in the first eleven months of 2025, we maintain our Overweight position on the region’s equities going into 2026.

As mega forces reshape economies and financial markets, we see Asia contributing significantly to this transformation and offering opportunities for equity investors, such as in the areas of: (i) AI and robotics; (ii) advanced manufacturing; and (iii) metals and mining, which is experiencing a resurgence with the transition to green energy, electrification and infrastructure development.

Potential Fed rate cuts would also result in easing of financial and liquidity conditions as well as a weakening of the US Dollar. These have historically benefitted Asia ex-Japan equities and also come at a time when a number of Asian and major Developed Markets central banks (with the exception of the BOJ) find themselves with room to ease further ahead. A more aggressive fiscal policy stance across Asia is also likely to support growth ahead. That said, there are idiosyncratic factors that we need to be mindful of which could result in near-term volatility, such as geopolitical uncertainties and social unrests.

Within Asia ex-Japan, we favour China/Hong Kong, Singapore and Malaysia, but see the risk-reward profile as less favourable for Thai equities.

China/HK – Favourable tailwinds still in place

As we move into 2026, we stay constructive on Hong Kong and China equities and prefer the offshore China equities market.

Following the US-China Presidential Summit, US-China trade relations have entered a new truce period, which should help lower equity risk premium and return the market’s focus back to fundamentals.

Several positive tailwinds should stay intact going into 2026, including: (i) the US rate cut cycle which should be supportive for Hong Kong and offshore China equities; (ii) improving earnings growth outlook with earnings growth of the MSCI China index forecasted to improve from +2% year-on-year (YoY) in 2025 to about +13% YoY in 2026; and (iii) the bottoming of ROE, which is supported by a rebalancing of growth as highlighted in the 15th Five-Year Plan.

Positioning remains favourable with global equity funds still underweight on Chinese equities. Policymakers’ initiatives in encouraging long-term capital into equity market as well as Chinese household’s asset reallocation should continue to support incremental fund flows.

With valuations normalised, we expect earnings will play a larger role in driving market performance. We prefer investment themes focusing on: (i) quality yield; (ii) AI proxy; (iii) policy beneficiaries; and (iv) better outlook.

Global Sectors - Favour sectors poised to benefit from greater investment vs consumer-dependent ones

The set up for 2026 suggests that investment spending is likely to outpace a relatively soft consumer backdrop. While productivity gains and policy incentives are supportive – particularly those stemming from the “One Big Beautiful Bill Act (OBBBA)” – labour market softness continues to weigh on consumer sentiment. This supports a regime where more capital-intensive sectors remain favoured over consumer-driven ones. As such, in terms of sector preferences, we favour the IT, Communication Services, Materials and Utilities sectors going into 2026. Consumer Staples may outperform during times of volatility, but we are cautious on the deteriorating health of the lower-income consumer, while we see the risk-reward for Consumer Discretionary being even less favourable due to the dim outlook and margin pressures in certain sub-segments such as autos and retail. We advocate exposure to names with structural growth drivers while maintaining resilience with stable, cash-generative businesses.

Tech prospects remain sound

Going into 2026, we continue to remain overweight Tech (Communication Services and IT), driven by AI, cloud growth, a resilient consumer, and tailwinds from a Fed that is likely to cut rates in a non-recessionary environment. Tech companies will need to demonstrate a path towards AI monetisation and reduce client concentration risks. We continue to see hyperscalers as beneficiaries of elevated demand for AI compute but we would be watching the manner in which their CAPEX is being financed. Software is likely to remain a battleground with seat-based business models coming under pressure, but selected software names that can incorporate AI into their offerings present reasonable value at this juncture.

Much depends on AI after a year of rotation and style factor crowding

Investors started 2025 crowded into Quality Growth, followed by Low Volatility in March, and then aggressively rotated into the AI theme, preferring: (i) Quality Growth – largely first order AI beneficiaries; and (ii) High Beta/Speculative Growth, such as emerging growth opportunities with inferior cashflow generation. In 2026, market concentration is likely to remain elevated in Quality Growth, but if AI expectations disappoint, it could spark a reversal in concentration, favouring a rotation into Low Volatility.