Union Connect: Equity Market Outlook 2026 – “It is not accurate to speak of a bubble”
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The outlook for equities this year is encouraging global growth is expected to improve slightly, while – under political pressure – the US Federal Reserve is likely to continue cutting interest rates. From a regional perspective, the US and emerging markets continue to offer opportunities, but investors should pay particular attention to Europe, explains Arne Rautenberg, Head of Equity Portfolio Management, in conversation.
Mr Rautenberg, how would you describe the general environment for global equity markets?
Arne Rautenberg: The environment for global equity markets is brightening. In mid-December, the US Federal Reserve cut interest rates for the third consecutive time. We expect two further rate cuts in the second half of 2026. Leading indicators also point to an economic upturn, and US consumer sentiment has recently improved. The outlook is also positive in the eurozone: especially in Germany, where the infrastructure package, combined with rising defense spending, should provide additional growth momentum.
The AI boom remains intact, as evidenced by a steady stream of new investments and projects in the sector. However, the extremely high growth rates of the past are unlikely to be sustained and will gradually decline. On the other hand, we are seeing improved growth in other areas of the US economy. This leads to a more balanced and therefore healthier development. Furthermore, investors are not yet excessively invested in equities as an asset class.
The AI boom remains intact, as evidenced by a steady stream of new investments and projects in the sector. However, the extremely high growth rates of the past are unlikely to be sustained and will gradually decline. On the other hand, we are seeing improved growth in other areas of the US economy. This leads to a more balanced and therefore healthier development. Furthermore, investors are not yet excessively invested in equities as an asset class.
Where do you see the greatest opportunities and risks from a regional perspective?
Arne Rautenberg: In the US, we expect stronger consumer dynamics and solid investment, now that the negative effects of tariffs have been absorbed. The labour market also continues to show little sign of weakness. However, self-inflicted supply bottlenecks, caused by restrictive tariff and immigration policies under President Donald Trump, could soon become a drag and a driver of inflation. Countermeasures are possible and likely if pressure mounts. President Trump will need to take action to improve his poll ratings ahead of the mid-term elections in November 2026. This should have a positive impact on consumption. We therefore see opportunities for US equities, not limited to the "Magnificent Seven" – the large tech stocks. Their percentage profit growth is expected to slow, while many other sectors should see an increase. We anticipate broader market participation, which is also healthy for the market.
At the start of 2025, significant capital flowed into European equities, particularly in infrastructure and defense. However, the market's expectations were too high too soon, but the positive effects of the German stimulus package should now become visible in corporate earnings. Early signs can be seen, for example, in the recent rise in German defense-related order intake. Underlying growth momentum in the eurozone should pick up compared to 2025.
Emerging market equities also remain promising. They benefit from a weaker US dollar, which is likely to remain under pressure during the US rate-cutting cycle. However, careful regional selection is essential in emerging markets, as country-specific factors play a very important role. We see opportunities particularly in South Korea, India, Brazil, and South Africa. China, on the other hand, remains a concern due to its weak growth momentum.
The term "AI bubble" is on everyone's lips now. Is there such a thing? And will the high market concentration in the "Magnificent Seven" persist?
Investments made in artificial intelligence so far – relative to US GDP – are still nowhere near the levels reached by personal computers or the internet. Back then, the development was driven by many smaller companies, not all of which were listed. Today, we are dealing with a handful of very large US corporations, which report on their business regularly and transparently. These companies are currently leaving no doubt that they will continue to expand their investments in AI infrastructure, even though it is difficult to estimate the exact returns these investments will generate. Not all companies currently active in the AI ecosystem will be successful. Which sub-industries and companies will ultimately emerge as winners in this still very young and dynamic industry cannot yet be answered.
Unlike during the dot-com bubble of the 1990s, investors today are scrutinising the valuations of AI-related companies very closely. It is therefore not accurate to speak of a bubble in this context. For example, Nvidia's share is not particularly expensive at present, partly because the market is pricing in the expectation that its extremely high gross margin of 70 per cent will not be sustainable. Growing competition will, of course, put pressure on margins. Alphabet, with its subsidiary Google, is a case in point: it has brought its own AI accelerators (TPUs) to market – less powerful, but competitive and more cost-effective for its purposes. So, market mechanisms are working in the AI sector as well.
However, we expect that the winners in the equity market in 2026 will no longer be found solely in the AI segment. The relative importance of the AI sector will decline. As the economic upturn narrows the gap between the high profit growth of AI-related companies and the broader economy, diversification into cyclical companies, such as selected industrial, logistics, and service stocks, makes sense.
Economic growth with improvement over the course of 2026
GDP forecast higher than a few months ago
Source: Union Investment, as of 2 January 2026
At the start of 2025, significant capital flowed into European equities, particularly in infrastructure and defense. However, the market's expectations were too high too soon, but the positive effects of the German stimulus package should now become visible in corporate earnings. Early signs can be seen, for example, in the recent rise in German defense-related order intake. Underlying growth momentum in the eurozone should pick up compared to 2025.
Emerging market equities also remain promising. They benefit from a weaker US dollar, which is likely to remain under pressure during the US rate-cutting cycle. However, careful regional selection is essential in emerging markets, as country-specific factors play a very important role. We see opportunities particularly in South Korea, India, Brazil, and South Africa. China, on the other hand, remains a concern due to its weak growth momentum.
The term "AI bubble" is on everyone's lips now. Is there such a thing? And will the high market concentration in the "Magnificent Seven" persist?
Investments made in artificial intelligence so far – relative to US GDP – are still nowhere near the levels reached by personal computers or the internet. Back then, the development was driven by many smaller companies, not all of which were listed. Today, we are dealing with a handful of very large US corporations, which report on their business regularly and transparently. These companies are currently leaving no doubt that they will continue to expand their investments in AI infrastructure, even though it is difficult to estimate the exact returns these investments will generate. Not all companies currently active in the AI ecosystem will be successful. Which sub-industries and companies will ultimately emerge as winners in this still very young and dynamic industry cannot yet be answered.
Market concentration in the US has been high recently – is a turnaround imminent?
MSCI World: More than 70 percent US exposure
Source: Bloomberg, Union Investment, as of 31 December 2025
Top 10 stocks account for nearly 40 percent
Source: Bloomberg, Union Investment, as of 31 December 2025
Unlike during the dot-com bubble of the 1990s, investors today are scrutinising the valuations of AI-related companies very closely. It is therefore not accurate to speak of a bubble in this context. For example, Nvidia's share is not particularly expensive at present, partly because the market is pricing in the expectation that its extremely high gross margin of 70 per cent will not be sustainable. Growing competition will, of course, put pressure on margins. Alphabet, with its subsidiary Google, is a case in point: it has brought its own AI accelerators (TPUs) to market – less powerful, but competitive and more cost-effective for its purposes. So, market mechanisms are working in the AI sector as well.
However, we expect that the winners in the equity market in 2026 will no longer be found solely in the AI segment. The relative importance of the AI sector will decline. As the economic upturn narrows the gap between the high profit growth of AI-related companies and the broader economy, diversification into cyclical companies, such as selected industrial, logistics, and service stocks, makes sense.
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For 2026, we see two major drivers in global equity markets. First, the continuation of the AI boom. Even if the enormous growth rates of recent years can no longer be fully achieved, investments in and applications for artificial intelligence continue to increase. The second driver is likely to be the return of investors to Europe. The growing momentum, not least driven by the German fiscal package, should support European equity markets.
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Can equities contribute to diversification in a portfolio context?
If equity investments are broadly diversified by theme and region, they can contribute to portfolio diversification. The DeepSeek moment at the end of January 2025 was a good example: while the S&P 500 index lost around ten per cent due to its high concentration in big tech stocks, European indices closed significantly higher. Their cyclical orientation was an advantage in this case. For the first time in a long while, European equity markets are decoupling from US exchanges, which were at times driven almost exclusively by a handful of growth stocks. Especially when the AI sector shows relative weakness, Europe gains momentum. This trend has already continued at the start of this year, and we expect it to persist throughout 2026. In addition, Europe should generally benefit from improved growth momentum. We are particularly positive on selected IT service providers and construction and infrastructure companies.
Which sectors are likely to see a revival in 2026?
Some sectors have recovery potential. This applies, among others, to the European automotive industry. After the EU Commission withdrew its plans for a strict ban on internal combustion engines from 2035, German carmakers Volkswagen, Mercedes, and BMW have gained more leeway.
Healthcare stocks went through a difficult phase after the end of the coronavirus pandemic, as many patents expired and pipelines were rather thin. There were also growing concerns about the planned US healthcare reform. In the meantime, the first agreements between the pharmaceutical industry and the government show that the outcomes are less burdensome than feared. In addition, product pipelines have been replenished, and some promising drugs are close to approval. In the field of GLP-1 drugs (weight-loss injections), competition has intensified, and market breadth is increasing. The outlook for healthcare is therefore improving, while many companies' share prices are still at relatively low levels. In the consumer sector, prospects are particularly good for the European luxury segment, while in the US, lower-income groups are struggling with inflation-induced loss of purchasing power. Consumer staples stocks therefore appear less attractive to us.
The share of cyclical companies is increasing
Which sectors are likely to see a revival in 2026?
Some sectors have recovery potential. This applies, among others, to the European automotive industry. After the EU Commission withdrew its plans for a strict ban on internal combustion engines from 2035, German carmakers Volkswagen, Mercedes, and BMW have gained more leeway.
Healthcare stocks went through a difficult phase after the end of the coronavirus pandemic, as many patents expired and pipelines were rather thin. There were also growing concerns about the planned US healthcare reform. In the meantime, the first agreements between the pharmaceutical industry and the government show that the outcomes are less burdensome than feared. In addition, product pipelines have been replenished, and some promising drugs are close to approval. In the field of GLP-1 drugs (weight-loss injections), competition has intensified, and market breadth is increasing. The outlook for healthcare is therefore improving, while many companies' share prices are still at relatively low levels. In the consumer sector, prospects are particularly good for the European luxury segment, while in the US, lower-income groups are struggling with inflation-induced loss of purchasing power. Consumer staples stocks therefore appear less attractive to us.
The share of cyclical companies is increasing
Earnings growth is expected to broaden in 2026
Source: Bloomberg, Goldman Sachs, Union Investment, as of 1 January 2026
The banking sector remains interesting in both the US and Europe. Financial institutions should benefit from ongoing global financing needs, while their balance sheets are robust. The aerospace and defense industry also remains promising. Compared to their growth prospects, these stocks are currently fairly valued. Even if a ceasefire is reached in Ukraine, the fact remains that the peace dividend has been exhausted and Europe (as well as the US) will need to continue investing in defense. The commodities sector also continues to offer opportunities, as it benefits directly from the infrastructure boom. We are particularly positive on the mining sector.
US utilities also remain structurally well supported. However, after the rally driven by the AI and data center boom, these stocks are already quite expensive. In the industrial sector, the shift in supply chains and the increase in automation technology are becoming apparent.
US utilities also remain structurally well supported. However, after the rally driven by the AI and data center boom, these stocks are already quite expensive. In the industrial sector, the shift in supply chains and the increase in automation technology are becoming apparent.
Your conclusion for the equity year 2026?
Equity markets are no longer cheaply valued, and it is unclear, especially in the AI sector, which companies will ultimately come out on top. Nevertheless, global stock markets offer numerous opportunities. Europe is likely to become more attractive again, not least because the German defense and infrastructure package should now be reflected in corporate profits for the first time. In addition, European equities offer valuable diversification benefits in a global context. Careful stock selection remains essential.
Source: Union Investment, All information, explanations and illustrations are as at 27 Jan 2026, unless otherwise stated