Barometer: Stocks to power on despite lofty valuations

Equities should continue rising because strong earnings growth outweighs stretched valuations, while bonds remain neutral and cash underweight.

• Pictet expects MSCI World earnings to grow by over 30% in 2026 and emerging-market earnings by over 65%, with inflation pressures likely to ease despite temporarily higher oil prices.
• Global growth remains resilient: the US is expanding at around 2%, AI-related spending has grown at an annualised pace of over 20% for two years, and the Federal Reserve sees a possible AI-driven productivity boost lifting long-run US growth towards 4%.
• Emerging-market equities outside China are preferred because earnings are forecast to rise 66% in 2026, versus 30% in the US and 15% in the euro zone; emerging-market GDP is expected to grow 3.8%, compared with 1.6% in developed economies.
• Pictet remains positive on information technology, where mega-cap AI companies generate about 41% of global corporate profits and two-thirds of earnings growth, while financials are supported by higher rates and corporate borrowing; consumer discretionary is upgraded to neutral and industrials downgraded to neutral.
• Government bonds are not yet a buy despite average global yields above 4%, because high public deficits, stronger-than-expected growth and possible changes to the Federal Reserve’s framework could keep yields elevated; gold remains overweight and emerging-market local-currency bonds offer better income potential.

Takeaway: Maintain an overweight in equities, focused on emerging markets outside China and information technology, but recognise that a further 50-basis-point rise in US 10-year yields or a 10–15% expansion in the S&P 500 valuation multiple would historically precede sharp corrections.