KEY POINTS:
- Equity markets are being reshaped by structural forces – AI, geopolitical fragmentation, fiscal expansion and divergent monetary policy – that are increasing dispersion within and across regions
- The AI investment cycle will continue to create volatility in markets, but also opportunities for investors
- Investors should consider wider megatrends affecting corporate balance sheets, including the energy transition and demographic changes
- Markets have shown resilience in the face of geopolitical shocks, but ongoing uncertainty could impact future returns
- Europe, Japan and emerging markets each offer distinct opportunities that merit dedicated exposure
Global stock markets reflect the complex and often turbulent times we live in. Technological innovation, geopolitical realignments, the energy transition, demographic shifts, divergent monetary policy and a renewed role for fiscal spending are all driving volatility, but also generating new sources of growth.
These forces show that stock markets are no longer guided by a singular dominant political or economic narrative. The result is rising dispersion – between regions, sectors and individual companies – which increases both risk and the potential for active management to add value.
Those seeking to capture opportunities should consider adopting a proactive, conviction-led approach – building portfolios positioned to benefit from structural change, while retaining the flexibility to respond quickly to fast-changing events.
What’s driving markets
AI was the dominant stock market theme of 2025, particularly in the US. Companies across the globe have ramped up technology spending and are accelerating investment in AI infrastructure.
But more recently the focus has shifted from expansion to monetisation, with investors questioning the likely returns on this capital expenditure. The answers have led to concerns about valuations and stoked fears of a potential bubble.
There have also been questions about overly-optimistic earnings projections, with technology companies’ profits forecast to rise faster than those in non-tech sectors over the next two years. However, while projections may be high, they are not significantly above the longer-term average. Earnings growth for the tech-heavy NASDAQ index is forecast to be 18% in 2026 and 17% in 2027, compared with a historic average of 14%.1
This tension between the longer-term transformative potential of AI and short-term valuations partly explains why share price volatility in the technology sector has been roughly double that of the broader market in recent months. But higher volatility has also brought superior returns: since mid-2025, the slope of the trend line for global tech stock performance has been nearly twice as steep as for non-tech equities.
AI is not the only structural force reshaping equity markets. European governments are committing to significantly higher defence and infrastructure spending, benefiting industrial and construction-related companies. Demographic shifts are altering the growth profile of entire economies. These megatrends are creating investment opportunities that cut across traditional sector boundaries, rewarding investors who can identify the companies positioned on the right side of these transitions.
Geopolitical challenges
There has been no shortage of geopolitical challenges over the past year, and these have only ratcheted up in 2026. This includes the ongoing struggle for economic influence between the US and China, particularly in light of US action in Venezuela. Meanwhile, the dispute over Greenland has led to a more fractious relationship between the US and EU. And the conflict in Ukraine continues, as do tensions in the Middle East.
Despite the turbulence, equity markets have largely weathered these geopolitical storms – in part because the direct impact on economic growth and corporate profits has been less clear-cut than it was for last April’s “Liberation Day” tariff announcements.
But this resilience does not eliminate risk. The greater danger lies in second-order effects: geopolitical disruption feeding into commodity prices, particularly energy and the rare earth materials critical for electrification and AI infrastructure; supply chain reconfiguration increasing costs for globally exposed companies; and political uncertainty complicating the path for central bank policy, especially at the Federal Reserve, where questions over the pace of rate cuts are already weighing on sentiment.
For equity investors, this backdrop reinforces the importance of earnings quality, pricing power and balance sheet strength. As recent history has demonstrated, geopolitical shocks can rapidly reprice markets. In light of this, investors must pay attention to geopolitical news alongside economic data and be prepared to adjust their portfolios accordingly.
Where we see opportunities
In Europe, equity valuations are meaningfully lower than in the US – including against US value indices. Europe has outpaced the US so far in 2026, driven by a tangible catalyst set: fiscal expansion through defence and infrastructure spending, a stable monetary policy outlook from the European Central Bank and corporate sectors that have adapted successfully to the disruptions of recent years. For investors, Europe offers a combination of reasonable valuations and structural tailwinds that is increasingly difficult to find elsewhere.
Meanwhile, investors should not overlook emerging markets’ ability to benefit from major structural shifts, particularly in relation to technology supply chains. Taiwan, South Korea and increasingly China are integral to semiconductor manufacturing and AI hardware development. Earnings growth expectations for emerging market technology companies remain robust – forecast at 30% in both 2026 and 20272 – and valuations for tech stocks in this region are often more compelling when compared with developed market peers. In addition, several emerging market central banks are more advanced in their easing cycles than those in the US and Europe, providing a supportive domestic backdrop that is not yet fully reflected in equity prices.
Japan also warrants attention. The economy has emerged from its deflationary cycle, with nominal GDP growth running close to 4.5%. Corporate reform continues to unlock shareholder value, and surplus corporate cash presents opportunities through increased investment, higher wages and shareholder returns. That said, valuations are elevated relative to history, making selectivity essential.
A portfolio construction reality check
Looking ahead, from our point of view, investors seeking alpha will need to think beyond old binary approaches. The ideas of developed versus emerging markets, US versus the rest of the world or growth versus value stocks no longer necessarily apply.
Instead, investors have to take a more nuanced and disciplined approach that does not lose sight of the fundamentals. For example, conventional wisdom holds that technology stocks are expensive and value stocks are cheap. The data tells a different story.
There have been well documented concerns around valuations in growth stocks. But some value-oriented markets and indices also appear stretched compared to historical averages. This highlights how these “style” labels can obscure underlying concentration and cyclical risks.
Investors who rotate out of growth and into value on the assumption that they are moving from expensive to cheap may be trading one concentration risk for another. The more productive approach is a dynamic one, with a focus on identifying durable earnings streams at reasonable prices, while diversifying across the structural drivers that are reshaping the investment landscape.
Navigating what comes next
The equity landscape in 2026 favours conviction-led, research-intensive investment approaches. Rapid technological change, geopolitical fragmentation and divergent policy paths are increasing dispersion within and across markets. Passive exposure may capture beta, but it also embeds concentration risk and offers limited flexibility in a rapidly changing world where markets are being reshaped by dynamic and often disruptive forces.
Based on our experts, successful equity investing in this environment is about anticipating structural change and allocating capital to the companies driving longer-term transformations – across regions, sectors and market capitalisations – rather than reacting to headlines or relying on style rotations that may not deliver the diversification they promise. Source: BNP Paribas Asset Management, March 2026
[1] Sources: FactSet, Bloomberg, BNP Paribas Asset Management, March 2026
[2] Sources: IBES, Bloomberg, BNP Paribas Asset Management
At the time of writing 2/3/2026, the Middle East conflict has not warranted any major changes to our base case macroeconomic outlook or investment recommendations. To follow our analysis of the events driving asset markets, go to Viewpoint at https://viewpoint.bnpparibas-am.com
