Target AI and policy-led growth from US to emerging markets

As the dominant driver of global market growth in 2026, AI is powering US equities, led by large-cap growth companies, and lifting emerging markets supported by favorable macroeconomic conditions and valuations. Meanwhile, monetary easing and deregulation in the US are creating opportunities in cyclical sectors like small caps and banks.

Artificial intelligence (AI) is no longer a distant disruptor—it’s a defining force in global markets. From accelerating productivity to reshaping competitive dynamics, AI is influencing everything from corporate earnings to policy decisions. In 2026, understanding how AI intersects with macroeconomic trends and evolving policy will be essential for investors seeking growth while maintaining resilience in a shifting macro landscape.

While global earnings are projected to grow by double digits in 2026, valuations are near or at post-pandemic highs, particularly in the US. This leaves little room for error. With multiple expansion unlikely to provide additional support, the focus shifts to earnings growth and the catalysts behind it.

AI the dominant driver of growth, not the only one

While the US is expected to lead developed markets in economic and earnings growth, AI-driven productivity gains extend well beyond US borders. Emerging markets (EM), in particular, offer a strong AI-led growth profile and more reasonable valuations than broad global equities.

But AI isn’t the sole driver of growth. Fiscal expansion and continued monetary easing may help offset headwinds from rising protectionist policies and geopolitical uncertainty.

To help capture AI- and policy-driven tailwinds, investors should consider:

• Diversified US growth leaders driving AI innovation and adoption
• EM equities combining improving AI sentiment, strong earnings prospects, and attractive valuations
• Cyclical US exposures—including small caps and banks—poised to benefit from monetary easing and deregulation

AI tailwinds powering US market leadership

Nowhere is AI’s impact more evident than in US equity markets. Growth stocks outperformed value in 2025, supported by strong delivery on high growth expectations. These trends rest on solid foundations as insatiable AI demand and resulting productivity gains continue to fuel growth.

In fact, consensus 2026 US earnings-per-share (EPS) growth estimates for growth stocks have been revised significantly higher since early Q3¹—despite macro headwinds such as higher tariffs, a softer labor market, and weaker consumer sentiment.

The US remains the epicenter of the global AI trade. Mega-cap tech is driving this momentum, with stock performance and growth expectations underpinned by AI spending and the promise of a productivity revolution.

AI capital expenditures (CapEx) are expected to remain strong, as adoption accelerates and exponential growth in demand outpaces supply. Consensus estimates for major hyperscalers’ 2026 CapEx have surged 25% from $314 billion at the start of the 2025 to $519 billion today, more than triple pre-ChatGPT levels (Figure 1).

Leading innovation and capturing early AI benefits, the Information Technology and Communication Services sectors—the top two sector allocations in the S&P 500 Growth Index—have driven S&P 500 Index earnings growth over the past two years. Momentum in these sectors is set to continue in 2026, supported by upbeat earnings sentiment and strong revisions.

While the Mag 7 has led the broader market on earnings growth for the past three years, the gap between big Tech and the rest of the S&P 500 growth cohort is expected to narrow in 2026, expanding opportunities across US equities.²

Slower AI adoption in non-US developed markets

As AI fuels growth in the US, the scale and speed of AI adoption continue more slowly across other developed markets. Regulatory hurdles, infrastructure gaps, slower corporate adoption, and even strict data privacy laws have slowed innovation and deployment. In addition, fragmented digital infrastructure and insufficient reliable power sources and networks have limited scalability.

Germany’s fiscal stimulus and Japan’s expansionary agenda under Prime Minister Takaichi may provide regional growth, but earnings and GDP projections for developed markets beyond the US still lag for 2026. Meeting or exceeding these projections also depends on the successful implementation of fiscal reforms.³

Emerging markets: AI momentum meets macro tailwinds

Emerging markets, in contrast, enter 2026 with strong momentum. After outperforming all regions in 2025—despite global trade tensions and US policy uncertainty—EM equities remain well-positioned for further gains.

While a weaker US dollar provided a tailwind in 2025, the primary drivers were positive sentiment around AI development, improving earnings outlooks, and a valuation re-rating. These tailwinds are likely to persist in 2026, reinforced by easing trade friction.

These EM economies are key players in the global AI race:

• China has rapidly advanced AI model development and domestic chip technology. Breakthroughs like Alibaba’s Qwen3-Max model highlight its ability to compete with leading US models, while domestic chips are increasingly capable of supporting AI deployment. Backed by strong government support and vast power capacity, China is positioned to challenge US dominance.
• Taiwan remains the backbone of global AI infrastructure through its world-class semiconductor ecosystem. As AI investment accelerates, Taiwan stands to benefit from robust demand for advanced chips.
• India ranks among the highest globally in end-user AI adoption. This has attracted investment from Microsoft, OpenAI, and Google, positioning India as a future AI infrastructure hub.

Macroeconomic conditions are also turning increasingly favorable. Global growth is expected to stabilize in 2026, and the most restrictive tariffs appear to be behind us—lifting investor sentiment. US rate cuts provide EM central banks more flexibility to support growth, while increased global liquidity from developed-market easing and a weaker US dollar are improving financial conditions—boosting EM capital inflows and reducing debt-servicing costs.

The earnings outlook reflects these improvements. Since June, analysts have raised 2026 EPS growth estimates for nearly 60% of EM countries, pushing EM earnings projections above those of non-US developed markets (Figure 2).

Despite these improving fundamentals, EM equities remain notably undervalued compared to developed peers—trading at a 32% discount based on next-12-month price to earnings (P/E).⁴ Recent market re-rating suggests there is still room for EM equities to close the valuation gap further and gain momentum.

Monetary easing and deregulation support selective cyclical exposures

AI dominates headlines, but it’s not the only story shaping markets in 2026. US monetary policy is expected to turn less restrictive as the Federal Reserve (Fed) shifts its focus from inflation control to labor market support. Job growth has slowed, with both private and government labor market indicators pointing to emerging softness. And while the labor market remains resilient compared to historical downturns, the slowdown warrants more easing by the Fed.

Small caps look compelling

Lower borrowing costs and improved risk sentiment should favor small-cap stocks, which have lagged large caps over the past year. Historically, small caps have outperformed large caps by 6% on average in the 12-month period following a Fed rate cut, with a hit rate of 72%.⁵

Improving economic growth prospects for 2026 may further support small-cap fundamentals, as consensus bottom-up EPS growth estimates point to 20% EPS growth, well ahead of large caps (Figure 2).

Although downside revision risks to growth projections remain, small-cap current valuations suggest markets have priced in an overly bearish outlook for small caps. Small-cap next-12-month P/E is trading at a 12% discount to its pre-pandemic five-year average and 36% discount to large caps—the largest valuation discount in 20 years (Figure 3). Few areas in the global equity market offer higher growth potential at such attractive valuations.

Banks positioned for a rebound

The attractively valued US banking industry could also benefit from lower interest rates and an improving economic outlook. Despite October’s regional bank loan headlines raising credit concerns, the industry exceeded high expectations in Q3, supported by:

• Continued loan growth
• Share buyback
• Stable asset quality
• Positive operating leverage

A steepening yield curve driven by more rate cuts and a sustained rebound in loan demand should support bank earnings growth into 2026. As a result, the industry EPS growth projections have been revised higher for both 2025 and 2026, to more than 13%.⁶

Policy shifts add support for banking industry

The Trump administration’s deregulation agenda and a more favorable regulatory environment could further support banks’ return on equity and industry consolidation.

The proposed changes to the Fed’s Comprehensive Capital and Analysis Review (CCAR) stress test and a more industry-friendly version of the “Basel III Endgame” may lead to lower capital intensity and greater flexibility in capital deployment.

Meanwhile, the FDIC and OCC have rolled back Biden-era banking merger policies and explored ways to streamline the approval processes, setting the stage for increased bank M&A activity in 2026.⁷

Positioning for a multi-dimensional market

Two powerful forces will define 2026: AI-driven innovation and policy-led macro shifts. AI remains a structural growth catalyst, reshaping productivity and earnings, while monetary easing and deregulation introduce cyclical opportunities that should not be overlooked.

Valuations are stretched in some areas and deeply discounted in others. This divergence creates both risk and opportunity. A selective approach—combining AI-powered growth with policy-supported exposures—offers a clear path for investors seeking resilience and upside in a market defined by rapid change.

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