Carlota Estragues Lopez, Equity strategists at St. James’s Place, comments on the key themes shaping global equity markets in 2026, the risks investors should monitor in the second half of the year, and where opportunities remain amid elevated valuations and growing concentration risks.
The key investment themes in the first half of the year have been dispersion and resilience. Dispersion has emerged across regions, styles, and sectors. At the start of the year, investors began diversifying US technology and growth exposures, recognising the risk of elevated valuations. This drove a rally in value and small caps, while emerging markets began to reverse a decade-long period of underperformance. The US underperformed the rest of the world by 9% as this trend dominated the first two months of 2026.
“Markets largely looked through geopolitical risks, while the ‘AI scare trade’ captured concerns around disruption, and led to a sell-off in software stocks. At the end of February, the US–Iran conflict escalated, and global equities experienced a peak-to-trough decline of 10%, followed by an 11% recovery over 17 days, ultimately proving a short-lived drawdown relative to the tariff uncertainty seen a year earlier.
“Three months into the conflict, with no clear resolution, markets have continued to rally. Momentum has overtaken traditional value and quality leadership, while emerging markets and Japan have moved into focus as beneficiaries of the AI supply chain. The EM index is up 27% YTD, outperforming global equities by 16%. In contrast, the UK and Europe have lagged, reflecting a weaker macro outlook driven by energy price volatility and higher inflation expectations.
“Against this backdrop, building resilient portfolios that can navigate different economic scenarios, through inflation protection and greater awareness of tail risks, has become a central priority for investors.”
Elevated valuations and concentration risks come into focus
“Over the next six months, returns are likely to rely more on earnings and income than on further valuation expansion, given elevated valuations globally. This is no longer solely a US story, which continues to trade at valuations 37% above their 20-year median, but emerging markets and developed markets outside the US are also trading above their median.
“One key risk is rising concentration. Diversification is becoming harder to achieve through regional allocation alone, as illustrated by the sharp increase of the technology sector within emerging market indices, now making up over 40% of the index.
“Macro developments will also be critical. Recession probabilities and stagflation risks have increased, particularly in the UK and Europe, raising questions about the durability of earnings growth.
“Overall, heightened uncertainty has led to a wider range of outcomes and a narrower opportunity set. This makes it an important time to reassess correlations and ensure portfolios remain properly diversified.”
Diversification and active management create opportunities
“At a headline level, we remain overweight World ex-US, emerging markets and small caps, and underweight US equities. This reflects extreme valuation differentials, improving fundamentals, supportive income, rising corporate activity and diversification benefits.
“In an uncertain environment, manager selection becomes increasingly important for diversification and alpha generation. Identifying active managers with the flexibility to uncover granular opportunities, whether within regions such as Latin America in emerging markets, or in styles that have fallen out of favour such as quality, can be a key source of added value.
“It is also a crucial time to stay disciplined within our asset allocation process, distinguishing between genuine dislocations that present opportunities and moves driven primarily by sentiment.”
