Article first published in The Business Times on 21 August here
Growth and earnings gains are extending across sectors, geographies, and styles.
Our Lombard Odier market outlook for the second half of 2026 is one of “broadening and deepening”.
The framing matters. It marks the difference between the earlier, narrower – and arguably more fragile – phase of the rally and the more expansive character the market has now assumed.
In the first quarter, equity performance was tightly concentrated. Advances were driven mainly by artificial intelligence (AI) themes. What has changed is not merely the level of the market – the S&P 500 Index hit a fresh record high last week – but the shape and quality of the advance itself. Let me explain.
As the second quarter earnings season draws to a close, the data and the price action show something more durable. Growth and earnings gains are extending across sectors, geographies, and styles. Participation is no longer confined to a single “AI thematic” trade.
The market’s underlying support is deepening; leadership is spreading; while fundamentals and market dynamics are strengthening rather than becoming stretched or extended.
From a portfolio perspective, this distinction is decisive. A narrow rally, lacking breadth, can reverse sharply the moment investor expectations reset. A broadening-and-deepening rally is inherently more resilient.
When more parts of the economy contribute to earnings, and when more regions and market styles and segments participate, price action becomes diversified and is less hostage to one dominant narrative.
Our Lombard Odier market outlook for the second half of 2026 is one of “broadening and deepening”
The clearest confirmation of the broadening thesis arrives in the earnings numbers. Technology stocks recovered after wobbles in the first quarter, supported by resilient second-quarter results. Importantly, they were not alone. Cyclical sectors held on to a large portion of their earlier momentum and, from a price perspective, have tested and broken through recent ranges.
The logic is straightforward. Non-AI capital expenditure is expanding. Capex is the transmission mechanism through which optimism becomes sustained demand for industrial inputs, equipment, and financing, supporting the earnings cycle well beyond software and AI-adjacent winners.
That same non-AI investment impulse is also lifting smaller companies. Small-capitalisation stocks – of which we are overweight – are participating more fully, helped by the cyclical rotation, stronger earnings growth, and valuations that still look comparatively attractive.
For investors concerned that markets had become overly concentrated in mega-cap or AI-driven names, this is a material development.
In the second quarter, earnings momentum also accelerated across emerging markets, Japan, and the US. Where it once seemed plausible to focus almost exclusively on the US for opportunity, the data now points to a more synchronised earnings cycle.
Consensus estimates for 2026 and 2027 have been revised higher in these regions, in many cases sharply, reinforcing the view that the earnings cycle is still working rather than peaking.
Geographic expansion itself speaks to a benign, non-inflationary macro backdrop, albeit one still vulnerable to a price shock – most obviously a geopolitical spike in oil prices. A recent soft payroll print, however, suggests a labour market that is not generating meaningful underlying inflation pressure.
This macro outlook remains constructive for equities and credit. It suggests the US Federal Reserve is less likely to feel compelled to tighten purely on wage or demand-driven inflation grounds. Our base case is that the Fed will hold policy rates at current levels for the remainder of the year.
Read about our ten investment convictions for H2 2026 here.
Against reasonably positive earnings and a supportive macro backdrop, our recommended stance is a measured increase in global equities, spanning both developed and emerging markets.
In fixed income, we prefer neutral sovereign duration with selective additions. We maintain an overweight in emerging-market hard-currency debt, paired with a more cautious approach to high-yield and investment-grade credit given that spreads are already tight.
Risks, of course, remain. The most serious would be an upside inflation surprise that forces the Federal Reserve to move faster and further than markets currently discount.
A single “non-cycle” hike or two could be absorbed; a full tightening cycle is not adequately priced and would likely prove damaging.
Our base case is that the Fed will hold policy rates at current levels for the remainder of the year
We also watch for renewed trade uncertainty, political risks linked to the US mid-term elections, and any sharper deterioration in credit conditions – especially if spreads stay tight while heavy AI-related issuance strains funding markets.
Finally, we continue to monitor the debate between durable AI-led productivity gains and an AI “bubble”. A bubble scenario could reintroduce sector concentration and weaken the very broadening process now underway.
Our broadening-and-deepening thesis does not eliminate cyclical or policy risk. It does, however, improve the quality and resilience of the equity opportunity. Leadership is no longer confined to a narrow set of names; participation is widening across sectors, regions, and market segments.
In our view, this expansion is both encouraging and durable – a shift from a one-trick, single-themed sprint towards a rally supported by improving earnings breadth, sustained capital spending, and more balanced macro conditions.
Source: The Business Times © SPH Media Limited. Permission required for reproduction.
Read how geopolitics is redefining markets in 2026 here.
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