During the first half of the year, external conditions were initially hampered by conflicts in the Middle East, yet the US, European, and Japanese stock markets generally trended upward, propelled by AI-related investments and the subsequent US-Iran ceasefire memorandum.
As of June 30th, the US Nasdaq Composite, S&P 500, and Dow Jones Industrial Average indices have risen approximately 11%, 8.7%, and 8.6% year-to-date, respectively, with the Philadelphia Semiconductor Index soaring about 101.1%. Japan's Nikkei 225 index climbed around 39%. Among major European markets, the UK's FTSE 100, France's CAC 40, and Germany's DAX 30 increased by approximately 5.7%, 3.1%, and 2%, respectively.
Examining the primary drivers of the market gains, sectors such as memory chips, semiconductor equipment, AI computing power, and cloud computing fueled the US stock rally. European equities delivered a more subdued performance without a clear, dominant theme for appreciation. The Nikkei 225's rise, which outpaced the underlying Japanese economy, was driven by the surge in the AI semiconductor supply chain and the benefits of moderate inflation.
Looking Ahead to the Second Half
Institutions are expressing a cautiously optimistic stance on the outlook for US, European, and Japanese stocks for the remainder of the year, with a general expectation of potential choppiness in the third quarter followed by a likely recovery in the fourth.
United States Market Forecast
The US market is anticipated to experience a volatile upward trajectory, with significantly amplified fluctuations. Institutions widely predict a period of high-level consolidation and increased volatility, particularly in the third quarter, before a potential choppy uptrend emerges in the fourth quarter. Regarding the S&P 500, both Morgan Stanley and Goldman Sachs project it could reach 8000 points by year-end, implying a roughly 6.7% gain for the second half, with the AI industry chain expected to contribute nearly half of the profit growth. Institutions like JPMorgan Chase, S&P Strategy, and Nomura Securities adopt a more cautious stance, forecasting a range between 7500 and 7800 points.
Analysts identify several key risk factors for US equities: persistent core inflation, a potentially significant delay in the Federal Reserve's interest rate cuts, policy uncertainty stemming from the US midterm elections, market valuations at historically high percentiles (around the 88th), and geopolitical conflicts disrupting oil prices. Conversely, continued capital expenditure on AI computing power, consistently strong earnings reports from technology firms, and the prospect of an economic soft landing are seen as supportive factors for the market.
European Market Outlook
Institutions believe European stocks may follow a slow, recovery-driven bull trend in the second half, potentially outperforming their US counterparts, primarily due to their significantly lower forward price-to-earnings ratios. However, European Central Bank monetary policy is viewed as the core variable influencing the market and the primary point of divergence among analysts. The majority of institutions expect the ECB to hold rates steady, with eurozone core inflation gradually declining, and no rate cuts anticipated until 2027. Some analysts, however, warn that a rebound in energy prices could reignite inflation, potentially prompting the ECB to hike rates by another 25 basis points in the fourth quarter, which would temporarily pressure European equity valuations.
Observers note that other major risks for European markets in the second half include a weaker-than-expected industrial recovery in the eurozone, geopolitical risks impacting energy supply, and mounting fiscal deficit pressures across various countries.
Japanese Market Perspective
While Japanese stock performance has notably diverged from the country's economic fundamentals, institutions still see structural opportunities in the second half. They anticipate that the Bank of Japan's recent rate hikes may present short-term headwinds, but ending the negative interest rate policy is viewed as beneficial for repairing bank net interest margins and improving financial sector profitability over the medium to long term. Key risks for Japanese equities in the coming months include a sharp yen appreciation squeezing export profits, resurgent inflation forcing the central bank to hike further, and a global slowdown in technology capital expenditure.
Overall Assessment and Shared Risks
Overall, there is no perceived systemic bear market risk for US, European, and Japanese equities in the second half of 2026. Market movements are expected to be structurally differentiated, with range-bound fluctuations likely becoming the dominant theme. Institutions highlight common downside risks across the three major markets: renewed Middle East geopolitical conflicts causing another sharp spike in oil prices, which could elevate global inflation and compel central banks to maintain high interest rates; a rebound in US core inflation reviving expectations of Federal Reserve rate hikes; global AI capital expenditure falling short of expectations, leading to downward revisions in tech company earnings; and economic performance weakening more than anticipated.
Comments