Can global stocks continue to look past geopolitical uncertainty and bouts of AI anxiety to power on in Q3? Strong earnings augur well, even as volatility remains in play. Our alpha-seeking investors look ahead with perspective on diversification in a concentrated market, underappreciated opportunities and the compelling prospects in parts of Asia.
Equity Market Outlook
At a glance
01.
Where’s the alpha?
Finding alpha today requires digging deeper into the dominant AI theme to uncover unexpected interconnections ― and opportunities.
02.
Following the cash flows
As capex reduces free cash flow in market hot spots, we identify other areas where the free cash may be flowing.
03.
Extending the AI lens
AI proliferation requires vast amounts of power ― creating vast opportunity in energy and infrastructure stocks.
04.
AI in Asia
Emerging markets have shown a performance edge year-to-date, fueled by Asia’s contribution to the global AI buildout.
Taking stock
Equities displayed resilience in the first half of the year, intermittently fazed but ultimately pushing past geopolitical uncertainty and periodic questions around the pace and trajectory of AI-related investment.
It’s not unreasonable to approach the second half of 2026 with healthy doses of optimism and vigilance.
We remain constructive on the long-term AI opportunity and continue to identify potential beneficiaries across what we see as a multi-year investment cycle. At the same time, we recognize the importance of diversification. We see value in broadening our focus to other areas of the global markets and discuss the possibilities in our Q3 Equity Market Outlook.
We continue to see scope for ample opportunity ― in both the AI theme and in areas well beyond it across global equity markets.
Finding alpha in fragmented equity markets
As the AI theme grows more nuanced, investors are challenged to look beyond prevailing market and factor trends to anticipate where the next opportunities may emerge beneath them.
This is where insights matter. Our systematic analysis shows some of the most differentiated insights have come from signals that identify linkages across companies, industries and markets. This has become more relevant as the AI buildout has scaled and leadership has extended beyond first-order beneficiaries. Company outcomes are less about their sector or geography and more about the role they play in the investment cycle. Applied through this lens, we see some of the strongest opportunities emerging in more discrete expressions within the infrastructure, power and industrial layers supporting the AI buildout.
Following the cash flows to unique equity opportunities
Free cash flow (FCF) is an important signal of business strength and, we believe, worth exploring to find equity diversifiers in an AI-driven market. Applying this lens leads us to opportunities in the energy, materials and healthcare sectors.
The current energy cycle could be elongated, in our view, given massive demand for power from the AI data center buildout and a reshaping of the global supply chain amid recent geopolitical events. The story is similar in materials, where a global desire to keep essential resources close to home is setting up a highly competitive landscape for an acutely short supply of natural resources. Meanwhile, the healthcare sector shows historically high FCF margins. Healthcare equipment is a particular area of interest for its compelling valuations and low correlation to AI.
Energy, infrastructure and extending the AI investing lens
One of the biggest constraints on AI development is energy and the infrastructure needed to deliver it, creating compelling opportunity in the companies that are best placed to both produce this power and get it to where it’s needed.
Our active investors believe large parts of the listed infrastructure universe could benefit from the AI-driven surge in electricity demand. As utilities spend on new sources of power to meet rising demand, this leads to larger long-term revenues (at prices set by national regulators) and potential for accelerating earnings growth. At the same time, utilities retain their defensive characteristics, meaning they may provide a measure of resilience in periods of market uncertainty.
How AI is powering equities in Asia
Asia may be an underappreciated AI beneficiary as it is home to several large companies that are feeding into the AI supply chain. A portion of AI investment from the big U.S. tech companies is flowing to the large Asian makers of the semiconductors needed for AI expansion.
Beyond chips, some of the world’s leading memory providers reside in Asia, as do several companies that are key to the expansion of global power infrastructure. Shortages of both memory and power have led to strong earnings growth for companies that operate in these areas. Cooling is another critical input for energy-intensive data centers, and greater chip power means an increasing shift from air to liquid cooling. This need is also being filled in Asia, where leading-edge companies are adopting next-gen cooling systems that enable greater computing power in the same space.
Authors
Raffaele Savi
Global Head of BlackRock Systematic
Jeff Shen
Co-Chief Investment Officer, Systematic Active Equities team – BlackRock
Carrie King
Global Chief Investment Officer, Fundamental Equities – BlackRock
Helen Jewell
International Chief Investment Officer for Fundamental Equities – BlackRock
Egon Vavrek
Head of EM and Asia Core, BlackRock Fundamental Equities
Key questions this quarter
Why BlackRock Fundamental Equities?
With decades of experience and a local presence around the world, our fundamental equity investors bring unique expertise to their discipline and deep, bottom-up insight that powers our mission to generate alpha for our clients.
Systematic Active Equities
For 40 years, our systematic equity investors have been harnessing data and technology to dynamically navigate and capitalize on investment opportunities in pursuit of consistent portfolio outcomes.