Global Market Outlook H2 2026: High Expectations Amidst Rising Risks

Entering the second half of 2026, global equity markets are displaying an optimistic outlook, driven by significant growth potential and expectations of a continuing bull market. Morgan Stanley's Global Investment Committee projects the bull market to extend into its fourth year, forecasting near double-digit returns for the S&P 500 Index. This optimism is primarily fueled by analysts' projections of 14% to 16% annual earnings-per-share (EPS) growth for 2026. The explosion in artificial intelligence (AI)-related capital expenditures has become Wall Street's rallying cry, further bolstered by expectations of an additional 50 basis points of rate cuts from the Federal Reserve (Fed) in 2026, following 2025's reductions.

Intensive investments in artificial intelligence are a pivotal factor shaping market dynamics. Tech giants like Google, Amazon, Microsoft, and Meta are planning a combined $725 billion in capital expenditures in 2026, marking a substantial 77% increase from the previous year. According to Goldman Sachs Research, AI-related investments are expected to drive approximately 40% of the S&P 500's EPS growth. AI infrastructure stocks, including memory chip companies and AI server manufacturers, are exceeding expectations, experiencing triple-digit product price increases due to demand outstripping supply. This robust corporate earnings growth and technology-driven momentum are considered the primary engines of the market's ascent.

However, this widespread optimism places markets on a fragile foundation due to elevated expectations. Equity valuations are already rich, with the Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio reaching 41.6 in May, the second-highest in over 140 years of U.S. market history. This suggests that even minor disappointments in earnings could trigger a disproportionate market reaction. Furthermore, inflation, which hit 4.2% in May—its highest in three years—is fueling fears of rising interest rates and exerting pressure on markets. Euromonitor International projects global inflation to reach 4.6% in 2026.

Geopolitical factors also represent significant risks that will influence market performance in the second half. The closure of the Strait of Hormuz, a consequence of the US/Israel-Iran conflict, has emerged as a defining economic disruption of 2026, causing Brent crude prices to surge by 45% during February-March 2026. This has led to downward revisions in global GDP growth forecasts. High energy costs are squeezing real wages and complicating the task of central banks. Particularly in advanced economies, reliance on imported hydrocarbons directly translates energy shocks into inflation, prompting central banks to raise interest rates.

Global economic growth expectations vary under these challenging conditions. The World Bank revised its 2026 global growth forecast downwards from 2.6% to 2.5% due to the Middle East conflict, warning it could fall to as low as 1.3% if energy supply disruptions intensify. Fitch Ratings, meanwhile, revised its global growth forecast for 2026 to 2.4%. Growth projections for the US economy are expected to slow to 1.9% according to Fitch, while the Eurozone is anticipated to decelerate to 0.9% and China to 4.6%. Consumers continue to face strain from negative real wage growth, weak savings, and rising energy costs.

Analysts and investment banks are setting various targets for the S&P 500 Index for the latter half of 2026. Morgan Stanley targets the S&P 500 at around 7,500, while Goldman Sachs Research anticipates the index to reach 7,600 by year-end, representing a 6% gain from April 24 levels. For Borsa Istanbul, a Midas Research report suggests that factors such as interest rate cuts, disinflation, rating upgrades, and foreign investor interest could enable Borsa Istanbul to continue its ascent in 2026, potentially surpassing the $300 level. The banking and real estate sectors, in particular, may attract investor interest as the Central Bank of the Republic of Turkey (CBRT) continues its interest rate cutting cycle.