Strong fundamentals point to further equity gains

Runtime: 6:00. Read the audio transcript.)

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Global equities could deliver double-digit gains over the next 12 months as resilient economic growth and more reasonable valuations outweigh geopolitical risks, says Lenny McLoughlin, chief investment strategist with Keyridge Asset Management.

Speaking on the Soundbite podcast, McLoughlin said exceptionally strong corporate earnings are giving equity markets room to climb despite persistent geopolitical and inflation risks.

“Growth has also been much more resilient than expected,” he said. “If you look at the median company, earnings grew 15%, well ahead of the long-term average of 7% to 8%, and around 6% ahead of expectations.”

He said guidance also reveals encouraging signs, with 2.3 times more companies raising guidance than lowering it.

McLoughlin said the AI theme should also remain an important source of support.

“The second quarter earnings season provided growing evidence that companies are finally beginning to monetize AI investment,” he said. “Increasing evidence of efficiency gains and productivity benefits should support the overall market over the next 12 months, and contribute to the ongoing broadening of market performance.”

He said one of the main risks to his positive outlook for the balance of 2026 remains the potential for a negative shock in the Middle East.

“A prolonged closure of the Strait of Hormuz could push oil prices materially higher, renewing stagflation concerns around weaker growth and higher inflation,” he said, adding that if the Strait of Hormuz remains closed for an extended period, inventory buffers could fall below critical levels and lead to another spike in oil prices.

“Prices of US$120 to US$125 a barrel would still be manageable, and would likely result in a modest slowdown in growth. However, sustained prices of US$150 or above would present more serious risks to both growth and inflation, and would be a significant headwind to our positive equity outlook,” he said.

If a resolution is reached in the Middle East and oil prices fall, inflationary pressures should ease, allowing the U.S. Federal Reserve to hold interest rates steady.

He said emerging market equities represent an attractive opportunity, in part because the composition of the asset class has shifted toward Taiwan and Korea, giving investors greater exposure to the AI hardware and memory supply chains.

“Emerging-market earnings are expected to grow by 71% in 2026 and 24% in 2027 — well ahead of developed market peers, driven largely by strength in Korea and Taiwan,” he said. “Despite this, emerging markets trade at a PE discount to developed markets that’s 23% wider than the long-term average, with Korea appearing particularly cheap.”

He said a strong long-term growth premium, more credible monetary and fiscal policy, lower volatility and attractive valuations all point to further outperformance from emerging market equities over the next 12 months.

McLoughlin also likes industrials, which offer structural exposure to themes such as energy security, food security, supply chain resilience, de-globalization and re-industrialization.

“From a thematic perspective, quality stocks can also provide an important anchor within portfolios and provide some defensive characteristics,” he said.

Quality stocks and industrials should benefit from the current mix of cyclical resilience and structural growth drivers, he said.

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