A market rotation, and how to respond to stagflation concerns

Summary:

Equities are expensive but underpinned by unusually strong earnings growth expectations

– US small caps (23%), EM (24%) and Japan (16%) have been big winners in 2026 (slides 5, 17-18)
– Performance has broadened out in the US but is highly concentrated in EM (slides 5-6)
– the Magnificent-7 have collectively returned 0% this year, US ex Magnificent-7 has returned 15%
– more than 80% of EM companies have underperformed, as Korean and Taiwanese chip companies dominate
– There is a bull market in earnings (slide 7):
– EM is on fire with more than 60% growth forecast for 2026 and a further 23% next year
– 24% and 19% growth is forecast for the US, for 2026 and 2027 respectively
– Most valuation metrics in most markets are near the top of their 20-year range (slide 8)
– Tactical longs for investors who are worried about the risk of stagflation (slide 9):
– value and quality styles, companies with conservative investment strategies, energy equities, defensive sectors.
– gold equities worth considering
– careful security selection needed in real estate and IT

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