Weekly market commentary

Higher global rates are raising the hurdle for returns, but they have not knocked us off our pro-risk stance. Higher rates and strong equities need not be contradictory – what drives yields matters. When higher yields reflect stronger investment and growth, the resulting earnings strength can help offset a higher cost of capital. That explains why we maintain our U.S. equity and AI overweights. Our return to an overweight in EM equities offers another way to invest in the AI scarcity theme.

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Exceptional growth without demanding valuations

12-month forward EPS growth and P/E, 2016–26

The bar for taking risk is rising as rates reset higher, making the durability of earnings more important. We think AI-related investment can support growth and profits even as the same investment boom absorbs capital, power and other scarce resources. EM equities now offer another place where earnings can clear that higher hurdle. The fundamental case has strengthened: earnings growth is exceptional even as valuations remain well below those in the U.S. See the chart. The tactical backdrop has improved too. We closed our previous overweight in EM equities in our Midyear Outlook in June as leverage concerns built, particularly in Korea. Korean equities subsequently experienced losses, and summer deleveraging has since eased those leverage concerns, supporting our return to overweight.

The numbers reinforce the case for returning to EM equities. Consensus expects headline earnings per share for the MSCI Emerging Markets Index to grow over 34% over the next 12 months versus about 20% for the MSCI USA Index. Yet EM equities trade at only 10 times forward earnings versus nearly 20 times for their U.S. counterparts. That is a 50% discount, with the EM multiple in the bottom 10% of its 20-year history. A weaker U.S. dollar could add support by easing financial conditions, supporting local currencies and encouraging foreign capital inflows. But our view does not depend on it. We see dollar weakness and stronger inflows as additional support rather than the foundation of our EM call.

EM at the center of AI scarcity

The headline EM rally masks very different sources of returns, but AI scarcity is one thread connecting them. South Korea and Taiwan sit at the heart of semiconductor, memory and hardware supply chains. Latin America, including Brazil, offers exposure to the resources and physical infrastructure needed for the AI buildout. These are different expressions of the AI scarcity theme that is an important part of our U.S. equity overweight. That overlap is deliberate and concentrates some of our equity exposure to the AI buildout. Over time, cheaper models and greater commoditization could shift where AI profits accrue. We therefore prefer to stay selective and dynamic rather than assume today’s winners will remain tomorrow’s.

We remain pro-risk, but see little room for complacency. We maintain our U.S. equity and AI overweights, return to an overweight in EM equities and downgrade short-term European government bonds to neutral. Two risks could challenge that stance. First, markets have absorbed the Middle East shock well, but Strait of Hormuz traffic remains severely constrained and scarcity has shifted downstream into refined products. Renewed energy pressure could keep inflation elevated just as the Fed faces a difficult policy choice. A hold despite persistent inflation and a tight labor market could test its credibility, with the term premium acting as a release valve as investors demand more compensation to hold long-term bonds. That could push long-end yields higher and raise the hurdle for equity returns. We stand ready to adjust as conditions change.

Our bottom line

Strong fundamentals keep us pro-risk despite higher rates. Exceptional earnings growth, attractive valuations and a cleaner tactical backdrop support our U.S. and AI overweights and a return to an overweight in EM equities. But this is not an unqualified bullish call. A lot can still go wrong, and we stand ready to shift from risk-on if the signposts change.

Market backdrop

Markets are balancing mounting macro pressures against strong corporate fundamentals. Brent crude topped $100 a barrel for the first time since July after the U.S. and Iran traded fresh attacks, while new U.S. inflation data prompted markets to ramp up Fed rate hike expectations. Long-term government bond yields remain near multi-decade highs. Yet stocks remain close to record highs. We think strong earnings help explain that resilience: U.S. earnings expectations have continued to rise, giving equities a cushion against higher rates and energy prices and reinforcing our overweight in U.S. stocks.

Central banks take center stage this week, with the Federal Reserve, Bank of England and Bank of Japan all setting rates. Strong jobs and sticky inflation have sharply raised the market odds of a Fed hike, though we don’t see one as a foregone conclusion. The BoE is expected to hold and the BoJ may need to normalize faster. We expect the decisions to keep global yields and currencies in focus.

Read our past weekly market commentaries here.

Intersecting mega forces

Since we launched our mega forces framework it has become clearer how their intersection shapes almost all our investment views and opens up alpha opportunities. They cut across asset class labels, spurring a rethink of portfolio construction. Investors need to be deliberate about the economic or thematic exposures they own, the vehicles they use to implement them and their investment horizons.

Asset class implications

Six- to 12-month tactical positioning, September 2026

This shows the implementation of our key investment views from the previous page through an asset class lens.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2026