“The optimism priced into markets doesn’t leave a lot of room for disappointment,” says Darrell Spence, a Capital Group economist.
According to Capital Group, the “dominance of the Magnificent Seven stocks may have passed its peak” since more companies “outside the small handful of US technology stocks associated with artificial intelligence” are driving returns. The Magnificent Seven refers to a group of high-performing technology stocks. The group comprises Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The counters have generally benefitted from the AI-led boom. Shares of Nvidia and Alphabet are up by 27% and 57% respectively year to date.
The announcement of new tariffs on most US trading partners by the second Trump administration earlier this year have coincided with major non-US markets outpacing the Magnificent Seven and the S&P500 Index, says Capital Group.
“As the world responds to a global restructuring, this trend could continue particularly as governments in Europe inject infrastructure and defence spending into their economies, while corporate reforms in Japan and other Asian economies have helped boost company valuations,” the asset manager adds.
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Expect higher earnings in 2026
Capital Group expects stronger earnings growth in 2026, led by the emerging markets (17.1%), followed by the US (14.2%) and Europe (11.1%). The asset manager notes that consensus earnings estimates for 2026 are “looking brighter” because of falling interest rates, government stimulus, newly announced trade deals and the boom in AI.
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“There is a lot of support from a macroeconomic perspective but, ultimately, what’s going to matter is corporate earnings growth,” says Diana Wagner, a portfolio manager at Capital Group. Aside from the technology sector, Wagner expects the industrials, financials and consumer discretionary sectors to see their earnings grow due to the supportive economic environment.
In terms of interest rates, Capital Group expects the Federal Reserve to lower interest rates to 3%, in line with the market consensus. Earlier this month, the Federal Reserve cut interest rates to 3.5% to 3.75%, down by 25 basis points. “A dovish Fed is likely to continue with rate cuts responding to labour market weakness,” Capital Group says.
The asset manager expects inflation next year to hover between 3% to 3.3%, above the market consensus of 2.6%. It adds that inflation is likely to remain above the Federal Reserve’s target though it could “drift downward if one-off price increases from tariffs wane or economic activity weakens.”
As for the US currency, Capital Group expects the US dollar to become weaker, due to falling rates and moderating growth in the US.
AI bubble? Too early to tell
Capital Group takes a sanguine view on whether the ongoing AI boom is a bubble waiting to burst. Chris Buchbinder, an equity portfolio manager at Capital Group, says that when compared to dot-com era from 1998 to 2001, AI looks more like it is “closer to 1998” where there’s more room to run, as opposed to the year 2000 when it popped.
“In my view, it’s too early to let the risk of a bubble overcome the compelling opportunities presented by this formidable technology,” Buchbinder says.
