juin-barometer-financial-markets-outlook

Asset allocation: upgrading equities to overweight as profits surge

Corporations worldwide are on a tear. That might seem difficult to reconcile with the fact that the US and Iran remain stuck in a fragile ceasefire. It also appears incompatible with a spike in energy prices and inflation. Yet the numbers speak for themselves. Our calculations show that, on average, company earnings per share are beating consensus forecasts by the largest margin in over four years, while analysts are raising their profit estimates at the fastest rate since 2004 (see Fig. 2). The corporate top-line is just as healthy. In a pattern consistent across all sectors represented in the MSCI equity index, revenue growth has outstripped expectations.

These fundamentals cannot be easily dismissed. Companies clearly possess more pricing power than previously thought, and this should provide strong support for equity markets over the medium term. For these reasons, we have upgraded equities from neutral to overweight.

Fig. 1 - Monthly asset allocation grid June 2026
June 2026

But while inflation is having a benign effect on equities, its impact on bonds is more likely to be negative, even if yields have moved higher in recent weeks. As price pressures build in the US, Europe and Japan, driven by rising energy costs, the probability of central banks hiking rates over the coming months will increase. This could push government bond yields even higher. With this in mind, we have downgraded bonds to underweight.

Our business cycle indicators point to moderately favourable economic conditions. In the US, the bright spot is capital expenditure, which, due to AI-related investment, is growing at an annual pace of 10%—more than double the average rate of 4.5%. This spending surge is more than offsetting weakness in other parts of the US economy, such as residential investment, which has recently contracted. Any continued rise in energy costs could eventually weigh on consumer spending, however, as the US is more oil-intensive than many other developed economies.

In Europe, meanwhile, the economy appears to be in reasonable shape, although official estimates for GDP growth have been revised lower in the wake of the energy price spike caused by the conflict in the Middle East. That said, there has been little evidence that higher energy prices are leading to price rises for other goods and services.

The Chinese economy presents a mixed picture. Exports remain an engine of growth, but consumer spending is weak, rising at a pace that matches GDP growth, while activity in the property sector remains subdued. More encouraging signals are emerging from other parts of the developing world.

In what we believe is a testament to the improving resilience of emerging economies, the currencies of oil-importing countries—which tend to suffer sharp declines during energy price spikes—have fallen three times less severely than in previous oil shocks.

Fig. 2 - Earnings optimism
MSCI ACWI financial year earnings per share consensus estimate

Our liquidity gauges suggest holding an overweight stance in equities, with monetary easing in China providing a particularly strong boost to the money supply. We expect to see further interest rate cuts from the People’s Bank of China later this year. That easing might be offset by tightening elsewhere, however, reinforcing our underweight stance on bonds.

In the US, price rises are running at pace that could lift inflation to as much as double the US Federal Reserve’s 2% target, raising the possibility of a hike in interest rates. Interest rate hikes are also likely in Europe although we expect policymakers to act less aggressively than the market currently anticipates. Monetary conditions also appear set to tighten in Japan.

Our valuation indicators suggest any equity rally could soon lose momentum. Emerging Asia stocks are now the most expensive on our global scorecard while Swiss equities are among the cheapest. When it comes to industry sectors, financial and healthcare stocks are the two cheapest while tech remains expensive. Bonds are by and large fairly valued given the recent rise in yields while in commodities gold stands out as being very expensive.

Technical signals have turned broadly positive for stocks. Investor surveys indicate positioning and sentiment are not excessively bullish on US stocks, which indicates there is scope for a continued rally. Our analysis also shows that any build-up in the pipeline of initial public offerings – a development currently unfolding in the US – is not a reliable indicator of an equity market peak as widely feared, but, on the contrary, tends to lead to gains in the near term.

Equities regions and sectors: concentration no barrier to future gains

The market turmoil that emerged during the initial phases of the Iran war now feels like a distant memory. Nearly three months into the conflict, equities are going from strength to strength. AI-related stocks have seen double- or triple-digit gains, helping lift major benchmark indices to record highs.

There are reasons to believe the rally has room to run. Not only are earnings strong, but margins are proving resilient. US companies’ net profit margin is, on average, expected to rise from the current 15% to 16% next year and 17% in 2028. We are also confident that companies are likely to sustain margin expansion in the medium term.

Strong earnings are also helping keep valuations in check. The median valuation for US stocks is 17.7 times 12-month forward earnings, below last year’s peak of around 20 and well below levels reached during the pandemic.

Some investors may worry that the rally is being powered by only a handful of tech firms: the number of stocks outperforming the S&P 500 index is at its lowest since at least 2007 (see Fig. 3).

Fig. 3 - Concentration conundrum
S&P 500: % stocks outperforming index in previous 10 weeks

But our analysis of similar episodes in the past shows that high concentration and narrow market leadership have not been a barrier to future equity returns as a broadening rally can sustain gains. Source: Bloomberg, Pictet Asset Management. End of June and December semi-annual price data. Data as at 22.05.2026

Robust primary market activity signals strong risk appetite. A wave of mega initial public offerings could push US equity fundraising beyond the record USD156 billion seen in 2021, with highly anticipated listings from SpaceX, OpenAI and Anthropic. IPO momentum is also accelerating in Hong Kong, where there are 350 companies in the pipeline.

Technology stocks are among our strongest convictions. Persistent bottlenecks along the AI value chain, particularly in memory chips, continue to support pricing power, giving these companies strong operating cashflows. We are also overweight industrials, which benefit from increased global infrastructure spending and electrification moves.

Our regional positioning focuses on markets with the strongest earnings momentum. We are overweight in the US, but remain neutral on Europe, Switzerland and Japan, where corporate earnings growth lags that of the US.

We remain overweight in emerging markets outside China. Many developing countries, especially in Asia, have shown remarkable resilience to the energy crisis. These economies already had strong growth and low inflation, making them less vulnerable than in past energy shocks. In Korea and Taiwan, rising AI-related exports have offset the impact from higher oil prices, helping keep terms of trade broadly stable.

We downgrade China to neutral from overweight as domestic demand and the property sector remain weak and near-term indicators point to risks to growth and corporate profitability.

Fixed income and currencies: flirting with inflation

In Bond movies, the villains come and go. In bond markets, the nemesis remains the same: inflation. Another confrontation appears to be approaching.

That’s why we are not seduced by the attractive yields currently on offer across much of the sovereign debt market. Benchmark 10-year German bund yields sit comfortably in sight of recent 15-year highs, while US Treasuries are flirting with the 4.5% mark. But we believe those levels are justified by increased inflation risks – and thus by a greater likelihood of tighter monetary policy and less favourable liquidity conditions.

This is particularly true in the US, where the narrative has shifted from expectations of interest rate cuts to growing concerns that rising inflation might force the Fed’s hand. With broad money growth running at a 10% annualised rate and borrowing elevated, it seems unlikely that inflation can return to target without tighter monetary policy. Indeed, with core PCE already around 1.3 percentage points above target and expected to rise further, the market is arguably justified in expecting tighter monetary policy over the next 12 months (see Fig. 4).

Fig. 4 -  Inflation power 
Market expectations for US rate hikes compared to core PCE inflation, %

Balancing the valuations with the risks, we thus retain a neutral stance on US Treasuries and, indeed, on all other major developed market sovereign bonds.

We see better potential in emerging market local currency debt, which offers even higher yields and ranks as the most attractively valued fixed income asset class in our model. Latin America in particular offers high real yields, which at a time when global inflation is on the up will likely draw interest among bond investors.

Fundamentals remain supportive. We expect the growth gap between emerging and developed economies to widen to 260 basis points this year from 240 basis points in 2025. And while inflation will pick up across the globe, its acceleration should be slower in the developing world.

Credit markets, meanwhile, should benefit from improving earnings dynamics: bottom-up analysts are upgrading their profit expectations for global companies at the fastest rate in five years.

However, this is counterbalanced by upside risks to inflation – and downside risks to economic growth.In currency markets, we downgrade the Swiss franc to neutral. The upcoming population cap referendum in Switzerland could have significant implications for growth, labour supply and investor confidence. While the baseline assumes no immediate policy impact, there is potential for market volatility and uncertainty, especially in relation to the Swiss franc and capital flows.

That leaves the Japanese yen as our only overweight in currencies. Not coincidentally, the yen is also the only currency that looks cheap relative to its 20-year history in our model.

Global markets overview: powered by tech

Global equities pushed higher in May, driven by strong earnings and expectations of a continued AI-driven boom in semiconductor demand.

First quarter earnings have beaten expectations across the board, prompting analysts to raise forecasts for future profits across regions and sectors.

However, although the positive earnings news has been spread across regions and sectors, investors have particularly zoned in on the prospects for tech. Within the S&P 500, 99% of IT companies exceeded first quarter earnings expectations, compared to an 84% beat rate for the index as a whole, according to LSEG I/B/E/S data.³

IT stocks rallied during the month, extending a very strong run (see Fig. 5). Over the past five years, cumulative returns on global tech stocks have now reached 168%.

Gains in semiconductor stocks in particular were even more spectacular. The Philadelphia Semiconductor Index, or SOX, jumped 25% on the month.

The tech rally was a boon for the US market as a whole, with the S&P 500 setting repeated record highs. IT stocks account for some 35% of the benchmark US index compared to just 7% of Europe’s STOXX 600.

Emerging markets gained 9.7%, boosted by rallies in tech-heavy Korea and Taiwan.

Earnings surprises have broadened beyond mega caps, with strong sales growth across sectors supporting margins and operational leverage.

The energy sector was the biggest loser, down 5.6% in the face of a sharp retreat in crude prices. Oil lost 18% in May – the biggest monthly drop in six years – on hopes of a peace deal between the US and Iran.

Fig. 5 - Tech supremacy
Global Tech (MSCI ACWI) total return, rebased (100=26.05.2021)

Global bonds edged slightly lower in local currency terms, reflecting increased concerns about inflation and longer-term debt sustainability. The moves were particularly pronounced at the long end of the curve: yields on benchmark 10-year US Treasury bonds reached 4.7%, while those on 30-year debt hit 5.2%. Both levels were the highest in nearly two decades.

UK gilts had a particularly volatile month, exacerbated by domestic political uncertainty. However, they managed to finish 2% higher, clawing back earlier losses after lower-than-expected inflation data and reassurances from potential Labour party leadership contender Andy Burnham that he will stick to fiscal rules if he is successful in ousting Keir Starmer as prime minister.

Emerging market debt also held up relatively well, supported by solid economic growth prospects.

Corporate bond markets welcomed the strong earnings news, with gains in both investment grade and high yield credit.

The dollar gained 0.9% against a basket of currencies.