Equity earnings have shown robust growth over the past decade, driving much of the positive momentum in global markets. Despite overall market gains, valuations in several key regions have become more attractive as earnings growth has accelerated, signalling potential opportunities for investors.
Looking ahead, earnings growth is expected to remain generally positive across major markets, with emerging economies forecast to take the lead in 2026. The technology sector, particularly information technology, is projected to deliver strong earnings this year, supported by solid performances in the energy and materials sectors. However, by 2027, forecasts indicate a divergence: technology earnings growth is set to maintain its rapid pace, while earnings in the energy sector may soften, reflecting shifting market dynamics and potential regulatory pressures.
In terms of valuations, despite some elevated market levels globally, emerging markets, alongside the United Kingdom and continental Europe, continue to trade at relatively modest multiples when measured against expected earnings over the next twelve months. Smaller capitalisation companies also remain relatively undervalued compared to their larger counterparts, suggesting potential areas for active investment focus.
A notable development within emerging markets is the evolving composition of major indices. Taiwan has recently overtaken China as the largest constituent in the MSCI Emerging Markets Index, with South Korea’s weighting also continuing to grow. This shift underscores the increasing concentration of technology-driven companies within these markets. Taiwan Semiconductor Manufacturing Company represents 57% of the MSCI Taiwan index, while Samsung Electronics and SK Hynix together constitute 54% of MSCI Korea. These firms are closely linked to the artificial intelligence sector, reflecting how emerging markets’ exposure is becoming heavily reliant on a narrow group of technology giants.
| Market/Region | Key Characteristic | Valuation Status |
|---|---|---|
| Emerging Markets | Technology-driven, led by Taiwan and South Korea | Relatively modest multiples |
| United Kingdom | Diversified, value-oriented | Trading below historical averages |
| Continental Europe | Mixed sector exposure | Modest forward multiples |
| United States | Technology-heavy, large-cap dominated | Elevated valuations |
| Small Caps (Global) | Broader sector exposure | Undervalued relative to large caps |
This concentration poses important questions for portfolio construction, especially for investors seeking diversified exposure to AI-driven growth. While technology stocks have delivered significant returns, their dominance increases risk concentration. Value investing emerges as a potential counterbalance, given its historical tendency to show lower correlation with technology-heavy equities and to outperform during periods when technology stocks face headwinds.
However, adopting a purely passive value strategy may not provide sufficient protection against AI-related concentration risks. Many value indices still maintain significant allocations to large technology firms, including the so-called Magnificent Seven, which diminishes diversification benefits. To mitigate these risks effectively, investors may need to pursue more selective, actively managed value approaches that can genuinely differentiate from technology-focused segments.
As the market landscape continues to evolve, understanding these nuances will be crucial for investors aiming to balance growth prospects with risk management in an increasingly technology-driven equity environment.
By Duncan Lamont