Constructive second-half outlook for US equities
Constructive second-half outlook for US equities
US equity market enters the second half of 2026 in a position of strength. We remain constructive due to strong earnings growth. Developments in AI through stock selection would matter more as valuations become stretched.
Lim Yuin
Chief Investment Strategist,
Lion Global Investors
US equity market rallied strongly over the past three years driven by its leadership in Artificial Intelligence (AI) advancements, resilient economic growth and better-than-expected corporate earnings. It enters the second half of 2026 in a position of strength, but investors are increasingly questioning whether the rally would last. We remain constructive due to strong earnings growth and developments in AI through stock selection would matter more as valuations are also becoming stretched.
Investment case for US equities
The investment case for US equities continues to rest on three pillars: earnings, innovation and resilience.
Corporate earnings momentum remains robust. Companies continue to demonstrate pricing power, productivity gains and healthy margins despite higher oil prices from geopolitical uncertainty, higher tariffs and potentially more restrictive monetary policies.
The second pillar is technology leadership. The AI investment cycle is proving broader and more durable than many initially anticipated. Capital expenditure by the hyperscalers continue to expand, driving demand across semiconductors, networking equipment, memory, software and power infrastructure. Importantly, AI is no longer confined to a handful of large technology companies. The investment cycle is increasingly benefiting a wider ecosystem of suppliers and enablers.
The third pillar is economic resilience. The US labour markets has shown resilience, and consumption has been healthy with recent economic data suggesting positive growth ahead. Certain lower-income consumer segments are showing signs of strain but the broader economy remains supported by employment growth, rising wages and business investment.
These factors suggest the US remains positioned to deliver healthy earnings growth over the next twelve months.
AI is driving market growth with broadening investment opportunities.
Investors are most excited on AI infrastructure plays over the past two years. Semiconductor manufacturers, networking suppliers and data-centre operators experienced significant valuation expansion as capital flooded into the theme.
Today, the debate is becoming more sophisticated. The question is no longer whether AI spending will continue. Instead, investors are increasingly asking whether the enormous investments being made by hyperscalers can eventually generate sufficient returns.
This shift explains the recent volatility in some semiconductor and AI infrastructure names leading to concerns within the investment community. However, we see the increasing volatility as healthy corrections after a strong rally and not indications that the AI theme is over. The underlying investment thesis remains intact. Demand for memory, networking equipment, advanced compute and data-centre capacity continues to grow. Earnings revisions across much of the AI ecosystem are positive.
Where the Opportunities Are
Technology
Leadership is broadening beyond semiconductor manufacturers to broader beneficiaries. Software companies that successfully incorporate AI capabilities into their products are emerging as potential winners in the next phase of AI adoption. Enterprise software, cybersecurity and productivity platforms are also well positioned to capture growing AI-related spending.
At the same time, networking and cloud infrastructure providers continue to benefit from expanding data-centre investment and increasing computational requirements.
One of the most underappreciated consequences of the AI boom is the growing demand for electricity. Data centres require substantial energy capacity, creating opportunities across utilities, power generation, grid infrastructure and electrical equipment. The market is increasingly recognising that AI deployment requires not only computing power but also significant investments in energy infrastructure.
This theme extends beyond traditional technology sectors and offers investors a broader set of beneficiaries from continued AI adoption.
Financials
Recent US bank earnings have reinforced confidence in the broader economic outlook. Trading activity, investment banking revenues and corporate lending trends remain healthy. Importantly, lending associated with AI-related investment continues to accelerate.
Improving capital market activity, a stronger M&A backdrop and resilient credit conditions provide support for selected financial institutions. Large-diversified banks with strong investment banking franchises remain attractive beneficiaries of continued economic expansion.
Industrials and Automation
Corporate America continues to invest in automation, digitalisation and productivity enhancement. Industrial automation firms, electrical equipment suppliers and infrastructure-related companies are likely to benefit as businesses seek to improve operational efficiency and accommodate growing technological requirements.
Risks ahead
Despite the constructive outlook, investors should remain mindful of several key risks.
First, valuations remain elevated, particularly within certain segments of the technology sector. The market's expectations for future AI-driven earnings growth are substantial, leaving little room for disappointment. For example, AI investments should ultimately translate into adequate earnings to sustain current valuations and any doubts could lead to a correction.
Second, inflation remains an important variable. Elevated oil prices driven by geopolitical tensions could slow disinflation progress and delay interest-rate cuts. Higher-for-longer rates could place pressure on equity valuations, particularly among growth stocks.
Third, market leadership remains relatively narrow. While earnings growth has broadened, index performance continues to be influenced disproportionately by a small number of large-cap technology companies. Any deterioration in sentiment toward these leaders could create broader market volatility.
Investment Conclusion
The outlook for US equities remains constructive. Strong earnings growth, resilient economic activity and sustained AI-driven investment continue to support the market's longer-term trajectory. However, the easy gains from broad multiple expansion may be behind us. The market is entering a more mature phase of the cycle, where earnings quality, cash-flow generation and valuation discipline become increasingly important.
Investment success would likely come from stock selection in companies benefiting from AI adoption, infrastructure investment and durable earnings growth rather than simply owning the most crowded market leaders. Stock selection could matter more than ever in the months ahead.
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