Global Strategy Mid-Year Outlook: Constructive, Not Complacent, AI Capex and Energy Risks Dominating Returns

Core Conclusions

This report adopts a "constructive, not complacent" stance across asset classes. The core driver stems from strong macro and micro fundamentals, along with an unprecedented AI capital expenditure cycle, supporting upside for risk assets. However, energy price volatility triggered by the Middle East conflict will widen return dispersion, and an oil price shock could nonlinearly evolve into a recession. In asset allocation, we overweight developed market equities (prefer the US), underweight core fixed income, and maintain neutral on commodities and cash. The S&P 500 target for mid-2027 is 8,300, based on EPS growth of 23% in 2026 and 12% in 2027, with a forward P/E of 20.5x. This view assumes geopolitical and energy price stability.

What the Market May Be Underestimating: The Dual Effects of AI Capex Scale and Financing Pressures

The market may be significantly underestimating the scale, duration, and financing impact of AI infrastructure capital expenditure. Since May 2025, total capex expectations for five hyperscalers have been sharply revised upward from approximately $450 billion for 2026/2027 to about $800 billion for 2026 and over $1 trillion for 2027. By 2027, this figure could reach $1.1 trillion. This cycle is not a short-term pulse but a strategic, sustained investment, and its funding needs will become a core variable in credit markets for years to come.

Credit channels are broader and deeper than anticipated, encompassing both public and private markets, with structural innovations blurring the lines between them. US investment-grade corporate bond total issuance is expected to reach $2.25 trillion in 2026 (up 25% YoY), and high-yield issuance $440 billion. This substantial new supply will pressure credit spreads, causing bonds to underperform equities. Meanwhile, AI-driven disruption in the software industry could generate real credit risk, though it is not considered systemic at present. Private credit risks are real but manageable—non-investment-grade corporate loans as a share of GDP are roughly unchanged from a decade ago, and the corporate debt-to-GDP ratio has even declined in recent years.

Investment implications: Equities' earnings growth story is more reliable than credit spread compression. Equity investors should focus on sectors benefiting from AI capex (financials, industrials, consumer discretionary, hyperscalers), while credit investors need to be wary of spread widening due to supply shocks, especially in investment-grade bonds.

Chain of Evidence: Earnings Improvement and Macro Resilience Support the Constructive View

Strong earnings are the bedrock of the constructive stance. In Q1 2026, the median S&P 500 stock's EPS surprise rate reached 6%, the highest in four years; earnings revision breadth accelerated from 5% at the start of earnings season to 22%. The median S&P 1500 stock's forward EPS growth has risen from 8% at the start of the year to 12%. Small-cap stocks (S&P 600) show forward earnings growth of 22%, indicating breadth in the economic recovery. US real GDP growth is forecast at 2.3% in 2026 and 2.6% in 2027; core PCE inflation gradually declines from 2.9% in 2025 to 2.3% in 2027, creating room for the Fed to deliver two rate cuts (to 3.125%) in 2027.

Earnings are also improving in Europe and Japan. MSCI Europe 2026 EPS growth is estimated at 11.2%, and Japan's TOPIX at 12%. European M&A volumes have more than doubled YoY, with companies using low valuations for consolidation. Japan's "return" momentum persists: corporate governance reforms accelerate cross-shareholding unwinding, and upstream supply chains benefit from government-led AI, power infrastructure, and defense investment. Emerging market EPS growth expectations are higher (MSCI EM 2026 +40%), but this is mainly driven by cyclical recovery rather than a structural bull market, lacking a sustained macro narrative.

Investment implications: Equities offer the best risk-reward among major asset classes, especially developed markets. The US remains the preferred market; European upside will only materialize after the Strait of Hormuz reopens; Japan, with structural reforms and upstream themes, continues to outperform emerging markets.

Key Divergences and Risks: An Energy Shock Could Upend the Base Case

The biggest risk stems from the Middle East conflict, whose resolution is the core variable for all commodities. The base case assumes the Strait reopens in June 2026, with Brent crude at $100-110/bbl in Q2/Q3 2026, falling to $80/bbl in 2027. However, if the shock worsens, a "global oil-led recession" scenario (Scenario 3) could emerge: US real GDP growth drops to 0.1%, core CPI rises to 4.5%, the Fed is forced to cut rates sharply to 1.625%, the dollar index falls to 88, and the S&P 500 could decline to 5,900 (29% below base case). High oil prices would curb consumption, offsetting potential stimulus effects from OBBBA (One Big Beautiful Bill Act).

Other key risks include: the return on AI capex has yet to be proven—if ROIC persistently disappoints, the earnings growth narrative will be challenged; central bank policy errors—the Fed and ECB could diverge in response to an energy shock (ECB hikes while Fed holds), leading to spread and FX volatility; structural disruption in the US credit market's AI-related software sector could push leveraged loan default rates to 5.5% (currently forecast 3.5%); and US fiscal cliffs and midterm elections add policy uncertainty.

Investment implications: Investors must hedge tail risks from oil prices. We recommend incorporating defensive quantitative strategies (long volatility, long VIX) into traditional asset allocation and dynamically adjusting portfolios to maintain resilience. We maintain neutral on emerging markets, avoiding passive index investing due to lack of macro narrative and high stock concentration.

Valuation and Trading Implications

Trading implications: Overweight equities (+5% vs. benchmark), underweight core fixed income (-3%), neutral on other fixed income, commodities, and cash. Within equities, developed markets over EM, US first, Japan overweight, Europe waiting for tactical opportunities. In bonds, curve steepening trades (2s10s widening) preferred over directional duration longs. Dollar weakness persists through H2 2026 but should be seen as cyclical rather than structural, bottoming in 2027 as US growth leadership and French election risk lift it. Among commodities, gold benefits from central bank buying and geopolitical risk, target $5,000/oz; aluminum is the preferred base metal; copper faces demand concerns.

Appendix: Data Summary

Major Market Targets and Valuations (Mid-2027 Base Case)

Scenario Analysis Key Variables (Global Oil Recession vs. Base Case)