Allocation Views: AI, earnings and the case for staying risk-on

Preview

In this month’s Allocation Views, we retain measured conviction toward equities into 2026, as influential pillars of support for risk assets—such as inflation, policy and corporate fundamentals—remain healthy. These dynamics are fueling our belief that equities will likely continue to deliver positive returns for investors, despite stretched valuations.

Leading indicators of global growth remain healthy, while a combination of lower inflation pressures and softening employment data provides a good background for stimulative US Federal Reserve (Fed) policy.

Equally importantly, corporate fundamentals show little sign of weakening, as trailing earnings growth remains strong. Global forward earnings expectations and earnings guidance breadth have also moved higher.

Taking these arguments into account, we maintain an overweight allocation to equities within our policy portfolio, offset by an underweight allocation to fixed income. We retain our underweight duration positioning amid ongoing fiscal deficit uncertainties, while also holding an overweight position to commodities for hedging and diversification reasons. 

Macro themes

A resilient growth story

• Certain leading economic indicators have weakened, but they remain broadly resilient, fueled by artificial intelligence (AI) capital expenditure (capex) and high-end consumers.
• Diminished tail-risk from tariffs has supported corporate sentiment and earnings, as evidenced by positive third-quarter reporting and guidance.
• The US economy has proven robust, but we continue to monitor labor market data, which has softened from a strong position but has not collapsed.

Moderating inflation trends

• Inflation sits above central bank targets in most developed economies, although inflation trends are broadly disinflationary.

• Tariffs have been absorbed by both consumer prices and business margins. Core goods inflation could persist, but pressures have likely peaked.

• Services inflation has eased due to lower housing costs and wages, helping counteract higher goods inflation.
   

Policy leans supportive

• Uncertain data may prevent the Fed from cutting rates again in the near term, but we expect moderate easing over the next year.
• Having said that, we think the magnitude of easing that markets are pricing in is too optimistic, given a robust economy and complicated inflation dynamics.
• Fiscal policy in major economies is an increasingly influential driver of asset prices. US tax refunds will likely offset tariff headwinds, while stimulus measures in Japan and Germany could also prove supportive.

Portfolio positioning themes

Responsibly bullish

• Positive earnings revisions and guidance support equity market momentum, outweighing valuation concerns, in our view.
• Leading and current indicators of economic strength remain broadly positive and support risk assets.
• Sentiment and positioning have become more optimistic. We believe this is a slight headwind for risk assets and feeds into the ongoing valuations debate.

Emerging equity opportunities

• We retain our optimistic view of US large-capitalization stocks relative to small caps and regional equities. Robust earnings and a supportive macro backdrop guide our thinking.
• Earnings expectations are rising rapidly across emerging markets (EM) ex-China, influencing our more constructive view on the region. Macro conditions are also supportive.
• We remain broadly pessimistic on international developed-market equities and downgrade Canadian stocks, amid weaker earnings growth forecasts and an uncertain macro backdrop.

Underweight government bonds

• We believe longer-term market expectations for Fed policy easing are too optimistic. Elsewhere, central bank rhetoric has become more hawkish recently.
• Fiscal deficits are widening in major economies, as governments increase spending or cut taxes to stimulate growth. Consequent yield effects make us selective on duration.
• Tight spreads diminish the risk-adjusted returns available from credit. Earnings growth leads us to favor equities.