Healthy bull market to digest gains
Healthy bull market to digest gains
As we head into the second half, peace talks between the US and Iran augurs well for the investment outlook. While the long-term bull market remains largely intact, in the near-term it could take a breather to digest the sharp gains made since late March.
Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore
Long-term fundamentals of AI-driven equity bull largely sound
In terms of our equity view, given rapid AI adoption and a firm earnings outlook, we believe the bull market's long-term fundamentals remain largely intact.
Notwithstanding some limited pockets of exuberance, we do not see widespread evidence that the broader market is in an AI bubble currently. Unlike the dotcom bubble of the 1990s, which was driven by soaring price-to-earnings (P/E) multiples with little earnings growth, today's AI-driven rally largely rests on robust earnings growth, while valuation multiples have in fact stayed mostly flat. The Magnificent Seven illustrate this well: their share prices have risen about 20% since early 2025, yet their average forward price-to-earnings valuation multiples has fallen from over 30x to about 24x, as earnings growth has outpaced price appreciation.
Nor do we see much evidence for the bearish argument that this growth rests on an AI-capex bubble. First, surging token spending suggests AI monetisation is starting to scale, and the hyperscalers behind most capex remain highly cash-generative with healthy order books. Second, given that most of them have track records of sound capital discipline, it is telling that they have invested steadily even in recent periods when the market punished their shares due to over-investment fears. Finally, with the Fed Funds rate at 3.75% and the 10Y US Treasury (UST) yield at 4.5%, this is not an "easy money" environment, and the cost of capital is another hurdle that enforces investment discipline.
Inflation is a wild card for markets
Since the pandemic, the S&P 500's forward earnings yield has converged towards the 10Y UST yield, as inflation has become a dominant macroeconomic factor, as it was in the 1980s and 1990s. Equity prices could thus come under pressure should long-dated yields rise on higher inflation, which is why we see inflation risks—closely tied to crude oil and the Middle East conflict—as a wild card for markets in 2H2026.
Despite recent US-Iran friction, if the White House broadly succeeds in normalising oil transit through the Strait of Hormuz, the resulting fall in crude prices will clearly ease inflationary pressures. This is much needed - since the war began, US CPI's month-on-month gain has jumped to 0.9% in March, easing only marginally to 0.6% in April and 0.5% in May. Should inflationary pressures remain elevated by year-end, we could see volatility emerging in risk-asset valuations.
Healthy bull market could digest gains over near-term
While the long-term AI-driven bull market remains largely intact, over the near-term it could take some time to digest the sharp gains made since late March. Although timing near-term market swings is impossible, several signals give us pause. First, the US call/put ratio points to highly bullish sentiment, which historically is a contrarian indicator. Second, rising levels of margin debt leaves the market more prone to volatility; and third, the rally's narrow breadth signals near-term vulnerability, though a sustained broadening beyond today's handful of AI leaders would ease the risk of a shakeout in 2H2026.
Given the overwhelming market focus on the AI theme, it can be easy for investors to lose discipline on managing concentration risks and ensuring diversification in their portfolios. As they stay invested for the long-term, this is an opportune time to assess the risks of over-concentration in specific markets, sectors or single stocks, and ensure portfolio resilience against volatility risks.
Favouring quality and carry in fixed income
In fixed income, spread compression and carry supported total returns in the first half of 2026. Credit was resilient with every segment posting positive year-to-date returns, and High Yield (HY) and Emerging Markets (EM) bonds outperformed their Investment Grade (IG) and Developed Markets (DM) counterparts.
We see rates volatility and dispersion as the key themes into 2H2026: the Fed's rate path and the mid-term elections will shape narratives, while shifting inflation and labour dynamics, plus reduced Fed guidance, could lift volatility. We look for spreads to widen moderately as the UST curve flattens, leaving carry an important support and credit selection paramount. We continue to favour high-quality credits and stay Neutral on duration. In DM, we prefer IG over HY given late-cycle dynamics and HY's unattractive relative valuation. Within EM corporates, we are Neutral on Asia and Latin America (Latam) and Underweight CEEMEA (Central and Eastern Europe, the Middle East, and Africa). Within EM sovereigns, we favour Latin America over CEEMEA and Asia, with opportunities in selected African sovereigns.
Important information
The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The information in this document is not intended to constitute research analysis or recommendation and should not be treated as such.
Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.
The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same. Investments are subject to investment risks, including the possible loss of the principal amount invested.
The Bank, its related companies, their respective directors and/or employees (collectively “Related Persons”) may or might have in the future interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. The Bank and its Related Persons may also be related to, and receive fees from, providers of such investment products.
No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.
The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank's written consent. The contents are a summary of the investment ideas and recommendations set out in Bank of Singapore and OCBC Bank reports. Please refer to the respective research report for the interest that the entity might have in the investment products and/or issuers of the securities.
Investments are subject to investment risks, including the possible loss of the principal amount invested. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures, predictions or projections are not necessarily indicative of future or likely performance.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
This document may be translated into the Chinese language. If there is any difference between the English and Chinese versions, the English version will apply.
Global Equities Disclaimer
- Dividend growth is not guaranteed, nor are companies in which you invest obliged to pay dividends;
- Companies may go bankrupt rendering the original investment valueless;
- Equity markets may decline in value;
- Corporate earnings and financial markets may be volatile;
- If there is no recognised market for equities, then these may be difficult to sell and accurate information about their value may be hard to obtain;
- Smaller company investments may be difficult to sell if there is little liquidity in the market for such equities and there may be substantial differences between the buying price and the selling price;
- Equities on overseas markets may involve different risks to equities issued in Singapore;
- With regards to investments in overseas companies, foreign exchange rates may move in an unfavourable direction affecting adversely the valuation of investments in base currency terms.
Cross-Border Marketing Disclaimers
OCBC Bank's cross border marketing disclaimers relevant for your country of residence.
Any opinions or views of third parties expressed in this document are those of the third parties identified, and do not represent views of Oversea-Chinese Banking Corporation Limited (“OCBC Bank”, “us”, “we” or “our”).