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May 2026
Positioning for second half of 2026
Given the latest developments relating to the Iran war and macro-economic outlook, we are calibrating our equity positions in our tactical asset allocation strategy by upgrading US equities from Neutral to Overweight, and downgrading Europe equities from Neutral to Underweight.
Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore
While we do expect persistent geopolitical uncertainties in the Middle East going forward, upward pressure on crude oil prices could ease if traffic resumes through the Strait of Hormuz as the Iran conflict moderates. We continue to monitor oil prices as a key indicator: they have remained rangebound between US$120 and US$90 per barrel during the war and have dipped below US$100 on news of peace talks.
Although further attacks cannot be ruled out, the conflict is gradually shifting away from a hot war, reflecting the White House’s desire for a swift offramp ahead of the US midterm elections. We are positioning our tactical asset allocation for the second half of 2026, marked by persistent geopolitical and energy uncertainties, resilient AI-driven fundamentals, and the US midterms.
To capture upside in US equities, given the push to end the war, a strong earnings outlook supported by AI, and the US being a net oil exporter, we upgrade US equities from Neutral to Overweight.
Conversely, we downgrade European equities from Neutral to Underweight given growth vulnerabilities amid energy uncertainty.
Overall, our equity stance shifts to moderately overweight, with a reduction in cash.
US – Upgraded to Overweight
We are upgrading US equities from Neutral to Overweight in our tactical asset allocation.
Historically, US equities have tended to recover from oil shocks within 12 months, particularly in no-recession environments. While higher crude prices may weigh on near-term growth, our base case remains that neither the US nor the global economy is headed toward recession. Compared to the 1970s, the global economy is significantly less dependent on oil, supported by alternative energy adoption, rising EV penetration, and the growing dominance of the services sector.
We also continue to see strong momentum in the secular AI theme, with expanding enterprise use cases and ongoing advancements in physical AI helping to alleviate earlier concerns around overinvestment. Despite the recent increase in fuel costs and associated pressure on consumer sentiment, there has been limited negative impact on S&P 500 forward earnings, particularly in consumer-related sectors.
Looking ahead, as the White House pivots toward domestic priorities ahead of the US midterm elections, potential pro-market measures – such as fiscal easing or deregulation – could support sentiment. A potential easing of geopolitical tensions would provide an additional tailwind.
Sector-wise, we favour technology, materials, and utilities.
Europe – Downgraded to Underweight
We are downgrading European equities from Neutral to Underweight in our tactical asset allocation. We are concerned that current valuations reflect overly optimistic earnings expectations, with consensus forecasting around 16% EPS growth for 2026 and 11% for 2027 – well above the flat growth seen in 2025.
Unlike the US, Europe is a net energy importer, leaving the region more exposed to sustained Middle East uncertainties. Europe is estimated to be roughly twice as sensitive to oil shocks as the US, with a 10% rise in oil prices adding about 40 basis points to inflation and reducing growth by over 10 basis points.
Europe is also vulnerable to disruptions in refined products. Nearly 45% of its middle distillate imports, particularly jet fuel, typically transit the Strait of Hormuz. Recent disruptions have already triggered warnings of potential shortages, forcing major airlines to cut flight schedules.
Elevated energy price volatility is likely to push inflation higher, prompting a policy response. Unlike the Fed, both the ECB and BOE have signalled potential rate hikes to counter inflation, further weighing on growth.
Recent PMI data show input prices rising faster than output prices, indicating margin pressure ahead.
Japan – Long-term structural themes stay intact
We expect the near-term focus will shift to company guidance in the upcoming full-year earnings reporting season. Japanese firms have the tendency in issuing conservative guidance even under normal circumstances.
Looking beyond the geopolitical uncertainties, we believe certain structural investment themes should stay intact: (i) AI, technology hardware, defence, energy and critical resources; and (ii) construction, real estate and trading companies. Also, the BOJ revised up its core consumer price index (CPI) forecasts in the April Outlook Report and assessed upside risk to inflation. Interest rate sensitive sectors like financials could catch up after recent underperformance.
Asia ex-Japan – Seeking out winners amid a crisis
Asia is among the more vulnerable regions in the US‑Iran conflict due to its reliance on Middle Eastern energy, but the crisis is also accelerating structural shifts that benefit parts of the region.
The energy shock is likely to speed up the transition away from fossil fuels, supporting sectors such as electric vehicles, energy storage, and renewables. China, given its strong position in the global energy transition supply chain, stands to benefit disproportionately.
At the same time, heightened geopolitical tensions are accelerating investment in infrastructure, supply chain resilience, AI, and cybersecurity - creating opportunities in semiconductors, data centres, advanced packaging, and AI adoption.
Rising geopolitical risks are also reinforcing defence spending and the push for self-sufficiency, benefiting aerospace, defence, and industrial automation sectors.
Within Asia ex-Japan, Hong Kong, China, and Singapore remain attractive. Singapore’s market, supported by strong dividends and sectors like financials and real estate, offers defensive appeal, with policy initiatives likely to boost liquidity and valuations.
China/HK – Maintain preference for A-share market
We prefer the onshore A-share market, where over two-thirds of market cap is in policy-supported sectors such as industrials and IT. The MSCI China Index remains fairly valued at 11.3x P/E, near historical averages. The launch of DeepSeek V4 has boosted AI sentiment, highlighting the structural advantages of leading internet firms in CAPEX and infrastructure. We continue to favour a barbell strategy, combining quality yield plays with exposure to AI themes and policy beneficiaries in technology innovation and domestic consumption.
Global Sectors – Growth leads, but crowding calls for caution
Year-to-date, the Global Energy sector has led performance, followed by Information Technology and Materials, while Healthcare has lagged. In April, Information Technology and Communication Services outperformed, driven by a rebound in growth stocks after easing US-Iran tensions.
The software segment recovered in April but remains below end-2025 levels. Concerns over AI disruption persist, highlighted by OpenAI’s introduction of cost-per-click ads in ChatGPT, which could challenge traditional advertising models.
Although Healthcare has underperformed, valuation opportunities are emerging, particularly in life sciences, tools, and diagnostics. Profit growth in this segment is expected to recover in 2026 and potentially accelerate further, supported by catalysts such as US reshoring efforts and a refresh of pandemic-era equipment.
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