Equity Outlook 3Q 2026: Broadening Earnings Growth Meets Elevated Volatility

Global Growth Accelerates, Driven by a Capex Supercycle

Consensus estimates suggest that global growth will accelerate in the coming years led by an AI supercycle that should trickle into the wider economy via an infrastructure-spending multiplier (top chart). This should support earnings growth, in our view, as forward EPS growth tends to track capex growth higher (bottom chart).

Global Growth Is Expected to Accelerate Over the Next Two Years

 

Global Capex Growth Continues to Drive Earnings Growth

 

Source: Neuberger, J.P. Morgan, Bloomberg and FactSet. Data as of June 30, 2026. Past performance is not indicative of future results. Nothing herein constitutes a prediction or projection of future events, future markets behaviour, investment advice or a recommendation to buy, sell or hold a security. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

The U.S. Economy Has Weathered the Hormuz Shock…

The U.S. economy has remained resilient through the closure of the Strait of Hormuz, supported by several structural factors. First, the labor market has held firm: Hiring has broadened in seven of the past eight months, indicating gains across a wider range of industries (top left chart). Second, massive AI-related capex—spanning equipment, software and data-center infrastructure—accounted for half of GDP growth over the trailing 12 months (top right chart). Third, on the supply side, sufficient manufacturing inventories have limited strain from Hormuz-related bottlenecks (bottom left chart), while ample stocks of domestic crude and gasoline helped ease pressure on consumers (bottom right chart).

More Industries Have Been Adding
Jobs in Recent Months

AI-Related Investment Helped Support Economic Growth Over the Last 12 Months

Inventory Buffers Have Cushioned Supply-Chain Disruption

Ample Stocks of Domestic Crude Helped Ease Pressures on Consumers

Source: Neuberger and FactSet. Data as of June 30, 2026. SPR means strategic petroleum reserves. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

…And Leading Indicators Suggest Solid Growth Ahead

Forward-looking indicators signal economic resilience, in our view. The breadth of components within the U.S. Leading Economic Index (LEI) has rebounded above 50% to its highest level since 2021 (top chart). The consensus view is that consumer spending and business investment are likely to remain strong through 2026, and that residential investment may turn from a drag into a growth contributor (bottom chart).

Leading-Indicator Breadth Has Rebounded Above 50%, the Highest Level Since 2021

 

Resilient Consumer Spending and Business Investment May Continue to Support U.S. Economic Growth

 

Source: Neuberger, Goldman Sachs and FactSet. Data as of June 30, 2026. Grey shading on LHS chart implies U.S. recessions. The Conference Board LEI comprises 10 components: avg. weekly manufacturing hours; avg. weekly initial jobless claims; manufacturers' new orders for consumer goods & materials; ISM new orders; manufacturers' new orders for nondefense capital goods ex-aircraft; building permits; S&P 500; Leading Credit Index™; 10-yr Treasury fed funds spread; and average consumer expectations for business conditions. The 6M diffusion index shows the share of these components rising over a trailing six-month window. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Real Yields, Not Inflation Expectations, Are Driving the Rise in Rates

We view the move higher in interest rates since late 2025 as normalization toward higher nominal growth rather than an inflation warning. Over time, the 10-year Treasury yield tends to gravitate around the economy's long-term nominal growth trend — the sum of real potential growth and trend inflation (top chart). Just as important is the composition of the move: Since October 2025, the rise in interest rates has been entirely driven by real yields, whereas market-based inflation expectations have remained muted (bottom chart). In other words, the market is pricing firmer growth and a higher real cost of capital, not an inflation problem.

The 10-year Treasury Yield Has Historically Been Anchored Around the Economy's Long-Term Nominal Growth Trend

 

The Rise in Interest Rates Has Been Entirely Driven by Real Rates, Not Inflation Expectations

Change in U.S. 10-Yr Treasury Yield (bps, October 22, 2025 – Current)

 

Source: Neuberger and FactSet. Data as of July 2, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Interest Rates Are Pricing Fed Hikes, But Equity Markets Disagree

We, along with our Fixed Income team, believe the Fed policy rate will likely remain unchanged in 2026, in contrast to market expectations of two hikes. While it appears current pricing reflects concern over near-term inflation driven by higher energy prices (top left chart) and supply-chain disruptions, we believe a potentially more meaningful gauge is sticky CPI, which remains anchored around 3% (top right chart). Equity markets appear to share our view: Multiples and policy expectations have recently diverged, suggesting to us that equity investors may not believe the Fed will be as hawkish as expectations now imply (bottom chart). We believe a more dovish Fed would support equity multiples in coming months.

Oil Prices are Normalizing Towards Pre-War Levels

Hawkish Fed Policy Expectations Reflect a Spike in Flexible CPI, While Sticky CPI Remains Anchored Near 3%

Equity Multiples Are Not Reflecting Hawkish Fed Policy Expectations

 

Source: Neuberger and FactSet. Data as of July 2, 2026. Pre-War is as of February 27, 2026. Peak hostilities are as of March 30, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Rising Yields Could Support Cyclical Sectors But Hurt More Defensive, Rate-Sensitive Ones

As real rates rise, we find that cyclical sectors—including Energy, Financials, Technology and Industrials—all tend to outperform the market whereas defensive, rate-sensitive sectors—such as Homebuilders, Real Estate and Utilities—tend to lag. This aligns with our sector positioning: We believe a real-yield-led normalization would tend to reinforce our barbell of high-quality Technology and Cyclicals, paired with an underweighting in bond-proxy defensives.

Rising Real Interest Rates Tend to Support Cyclical Sectors Over Defensive, Rate-Sensitive Sectors

 

Source: Neuberger and FactSet. Data as of July 2, 2026. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

An Earnings-Driven Rally: Fundamentals Are Improving Across the Board as Economic Momentum Gathers Steam

We continue to believe that earnings will continue to broaden beyond the mega-cap leaders. More companies in the S&P 500 Index are posting positive sales and income growth (top chart), with the median stock now seeing its strongest EPS growth in four years. We believe this is a sign the recovery is being driven by the broader market, not just a handful of names. Additionally, strengthening economic activity, which has historically led improving and broadening fundamentals, gives us confidence that growth will extend beyond the megacaps (bottom chart).

Sales and Earnings Growth Are Broadening Across the U.S. Market

% of Companies in the S&P 500 Index with Positive y/y Growth

 

Strengthening Economic Activity May Support Rising Profits

 

Source: Neuberger and FactSet. Data as of March 31, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Earnings Revisions Are Improving Across Most Sectors

Positive U.S. earnings revisions have risen sharply, a forward-looking confirmation of the recovery we flagged in realized results (top chart). Crucially, the upturn is meaningfully broad-based rather than concentrated: A large majority of sectors showed positive revisions over the last three months (bottom chart). We believe this is a signature of a genuine broadening across cyclical and defensive groups alike, not a narrow handful of leaders. This trend gives us confidence in the current rally's durability and, at the margin, the continued rotation toward more cyclical sectors where revision momentum has been strongest.

Positive U.S. Earnings Revisions Are Rising

 

Earnings Have Been Revised Higher Across Most Sectors

 

Source: Neuberger, Mill Street Research and FactSet. Data as of July 2, 2026. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

AI Capex: The Market Expects Returns, Not Just a Buildout

We see the AI capital cycle entering a return-on-investment phase. The market has begun de-rating hyperscalers as their capital intensity has increased, yet with sharp dispersion—rewarding visible returns while remaining more cautious where they have yet to appear (top chart). The recent pullback in LLM token prices also raises a key question: Do falling token costs reflect healthy elasticity or genuine moderation in demand? This scrutiny is already weighing on the hyperscalers (bottom chart) and we believe dispersion within the group may increase.

Larger Capex Outlays Have Pressured Hyperscalers’ Valuations

 

The Pullback in LLM Token Prices Has Weighed on Hyperscalers’ Returns

 

Source: Neuberger, Bloomberg and FactSet. Data as of July 3, 2026. The LLM Token Expenditure Index is a daily statistical benchmark designed to measure the effective expenditure level of the actively traded broad LLM market, measuring price per million tokens. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable.

Consumption May Slump If the Market Loses Momentum

Over the past few years, rising equity and asset prices have sharply lifted households’ net worth relative to income (top chart), emboldening consumers to save less and spend more. This has happened at a time when real income growth (excluding transfer payments) has remained flat, meaning organic wage gains have not kept up with inflation (bottom chart). Yet as wealth and consumption have grown increasingly concentrated, we worry that underlying demand could be at risk if equity markets were to sharply correct. Goldman Sachs estimates that roughly two thirds of the growth in annual consumption over the last two years was fueled by AI-related equity gains—implying that a pullback could transmit quickly from markets to spending to economic growth.

Strong Equity Gains Have Boosted Household Net Worth...

 

...Yet Incomes Have Not Kept Pace With Inflation

 

Source: Neuberger and FactSet. Data as of May 31, 2026. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Extreme Momentum Crowding May Invite More Volatility

As the momentum trade has grown extended and crowded, we believe the grind higher has become more vulnerable to sudden air pockets rather than fundamentals-led drawdowns. The MSCI U.S. Momentum Index is outpacing the broader MSCI U.S. Index by 24.7%, the largest gap in nearly 40 years (top chart). Meanwhile, sector leadership has narrowed significantly, with heavy tilts toward Technology, Financials and Industrials (bottom chart). What sets this latest episode apart, though, is that much of the move is justified by improved fundamentals rather than bubble-era hope: The companies exhibiting the most momentum continue to report strong earnings growth. However, we worry that even small disappointments could quickly unwind this trade.

Momentum-Factor Outperformance Has Hit a 40-Year Peak

 

The Technology Sector Now Dominates the Top Momentum Quintile Basket

 

Source: Neuberger, UBS, J.P. Morgan and FactSet. Data as of June 30, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Inflation Tail Risk Runs Through Supply Chains, Not Just Energy

The disruption from the U.S./Iran conflict has rippled beyond crude oil into petrochemicals, industrial gases, fertilizer and construction materials. We fear subsequent inflation may prove more persistent than the market assumes—not just in energy markets, but throughout the inputs downstream of it. Inventory buffers have spared a larger hit to global growth thus far, but until shipping and freight normalize, we believe backed-up supply chains could apply greater inflationary pressure (top chart), crimping economic activity over the next two years (bottom chart).

Backed-Up Supply Chains May Increase Inflationary Pressure...

 

...Which Could Hamper Economic Activity Over the Next Two Years

 

Source: Neuberger and FactSet. Data as of June 30, 2026. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

China: A Two-Speed Economy; Remain Overweight

We remain overweight Chinese equities even as a lackluster housing recovery has weighed on consumption. Investment—particularly in technology and AI—has been offsetting soft domestic demand by contributing 1.9 pp to GDP growth in 1Q 2026, up from 0.7 pp in 4Q 2025 (top left chart). China’s two-speed economy is visible in markets: Onshore advanced-manufacturing names (proxied by the CNXT ETF) have been outperforming consumer-facing internet platforms (tracked by the KWEB ETF), as shown in the bottom left chart. Furthermore, “anti-involution” policies, which aim to reduce excess capacity, have pushed PPI higher, with revenue and profit growth potentially to follow (top right chart), while a revival in IPO activity has reinforced investor sentiment (bottom right chart). Despite recent softer-than-expected activity data, we believe policy direction, inflecting profits and further tech self-reliance could be multi-year tailwinds as AI diffuses into manufacturing and the broader economy.

Investment’s Contribution to GDP Growth Is Rising

Reflation in China May Support Sales and Profits Growth

AI-Buildout Beneficiaries Have Been Outpacing Consumer-Facing Internet Names

A Pickup in Public Offerings Is Boosting Market Sentiment

Source: Neuberger, Macrobond and FactSet. Data as of July 3, 2026. The CNXT ETF tracks the ChiNext CNY Index, a market cap-weighted index of 100 small- and medium-size companies traded on the SME Board and ChiNext Board of the Shenzhen Stock Exchange. The KWEB ETF tracks the CSI Overseas China Internet index, a market cap-weighted index composed of overseas-listed Chinese Internet companies. IPO data shown as a trailing 12-month sum. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Europe: Softening Growth; Reducing Allocation Further

We are extending last quarter's downgrade on European equities. While the reopening of the Strait of Hormuz may offer Europe a near-term reprieve, our list of concerns on the region remains: Gas storage sits below average; real money-supply growth has rolled over; and the ECB could decide to hike into economic weakness. Crucially, being overweight Europe versus the U.S. is an implicit short on the Tech sector, given that the Euro STOXX 600 Index's relative performance has tracked the inverse of tech’s outperformance (top chart). Though positive earnings revisions have been rising, broader economic markers appear to be softening, which typically doesn’t bode well for cyclicals. And while much has been made of Europe’s fiscal plan, which should predominantly benefit Germany, we believe the bar is low and the track record is poor: German real GDP has grown only 1.5% cumulatively since 2019, with public investment doing the heavy lifting as private investment has stagnated (bottom chart).

Overweighting Europe (vs. the U.S.) Has Become an Implicit Bet Against the Technology Sector

 

A Combination of Heavy Public and Minimal Private Investment Has Delivered Weak Economic Growth in Germany

German Real Economic Growth (Indexed 2019 = 100)

 

Source: Neuberger and FactSet. Data as of July 2, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

India: Broad-Based Sell-Off Into Weakening Earnings; Downgrade to Neutral

Indian equities have lagged the MSCI ACWI by about 22 pp in 2026, with eight out of 11 sectors selling off (top left chart). The economy remains pressured by a widening current account deficit, contractionary fiscal impulse, negative net foreign portfolio investment, elevated real bank lending rates and dwindling FX reserves to protect a weakening rupee (bottom left and top right charts). Additionally, investors are using India to fund potentially more attractive EM positions in countries such as Korea and Taiwan. Meanwhile, earnings are still being cut, with 2026 EPS growth marked down from approximately 16% at the start of the year to 13% now. While equity valuations have come in a bit, we believe there’s still room for further de-rating (bottom right chart).

The YTD Sell-Off Across Indian
Equities Has Been Broad-Based

Tight Fiscal Policy Could Weigh on Growth

Elevated Bank Lending Rates May Discourage Credit Growth

Despite the Pullback in Valuations, We Believe There May Be Room for Further Declines

Source: Neuberger and FactSet. Data as of July 3, 2026. India Real Bank Lending Rate = weighted average lending rate (WALR) on fresh rupee loans sanctioned, scheduled commercial banks (RBI), less core CPI. Fiscal impulse is calculated as the inverse of the change in IMF Fiscal Monitor cyclically-adjusted primary balance as % of potential GDP. 2026-28 are IMF projections. Top left chart shows sectors in MSCI India Index. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Health Care: Potential Tech Sell-Off Hedge; Upgrade to Overweight

With valuations now at potentially attractive levels versus the broader market, we believe the Health Care sector may be a hedge against potential sell-offs in Tech: Health Care's excess returns vs. the S&P 500 Index are negatively correlated versus the Nasdaq 100 Index, offering a potential cushion should the AI/momentum trade unwind (top chart). At the same time, we believe the sector may stand to benefit from significant AI-driven productivity gains—from drug discovery to diagnostics and care delivery—as well as a handful of structural tailwinds, including a pickup in M&A activity (bottom chart), shorter drug-approval times and reduced regulatory uncertainty.

The Health Care Sector May Offer a Hedge Against a Correction in the Technology Sector

 

Health Care M&A Activity Has Been Picking Up

 

Source: Neuberger and FactSet. Data as of July 2, 2026. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Consumer Staples: Precarious Pricing Power; Downgrade to Neutral

The bottom leg of the K-shaped consumer continues to struggle with shrinking real incomes and historically low savings rates. Amidst those pressures, we fear the Consumer Staples sector may find it harder to maintain pricing power and protect operating margins in coming quarters (top chart). We believe valuations are no longer attractive: The sector trades near the top of its absolute NTM P/E range (~22x) and remains richly priced on a relative basis. Meanwhile, earnings growth estimates continue to get trimmed in the face of various structural headwinds, including tariffs, sticky commodity costs and lower immigration rates (bottom chart).

Potentially Waning Pricing Power May Put Pressure on the Consumer Staples Sector's Operating Margins

 

Analysts Continue to Trim Earnings Growth Estimates as the Sector Faces Various Structural Headwinds

Consumer Staples EPS Growth Estimate

 

Source: Neuberger and FactSet. Data as of July 2, 2026. Pricing power proxy is CPI minus PPI. Past performance is not indicative of future results. For illustrative and discussion purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Neuberger Regional Equity Recommendations

 

Global Equities (Overweight): Earnings-led, not re-rating. Credit impulse positive (+1.3% of GDP); growth broadening as more economies print 50+ PMIs.

U.S. Large Cap (Overweight): Recovery broadening beyond mega-caps — median stock's best EPS growth in four years. Barbell of quality Tech + cyclicals. Yield back-up is real-led, not inflation. OBBBA and AI capex add support.

U.S. Small and Mid Cap (Overweight): Geared to the industrial recovery and OBBBA capex impulse in 2H'26. Deregulation, lower taxes, reshoring — at a valuation discount. Balanced with quality large-caps given interest rate and geopolitical risk.

Europe (Underweight): Underperformance moves one-for-one with Tech/AI leadership. German growth is hollow — public spending only. 2026 EPS growth is half autos/banks; ECB risks tightening into weakness.

Emerging Markets (Overweight): More cyclical, more geared to global IP than DM. Korea/Taiwan add AI exposure; softer USD and ex-U.S. flow rotation are tailwinds.

Japan (Overweight): Earnings geared to global manufacturing; ample oil reserves cushion the energy shock. Governance reform, rising real wages, and policy support for AI/defense/shipbuilding.

China (Overweight): Investment and exports will support economic growth. “Anti-involution” polices are boosting profits.

India (Neutral): Positive macro headlines offset by elevated real rates (~5%), marked-down EPS revisions, a widening current-account deficit, negative foreign flows, and the largest fiscal drag in a decade.

Source: Neuberger and FactSet. Data as of June 30, 2026. This material is intended as a broad overview of the portfolio managers’ style, philosophy and process and is subject to change without notice. Portfolio managers’ views may differ from other portfolio managers as well as the views of Neuberger. Nothing herein constitutes investment advice or a recommendation to buy, sell or hold a security. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable.

Neuberger U.S. Sector Equity Recommendations

 

Comm. Services (Overweight): Positive earnings revisions near cycle highs; AI monetization and ad-cycle strength drive upgrades.

Cons. Discretionary (Underweight): Discretionary share of PCE below trend; energy a regressive tax; record equity allocations = reverse wealth-effect risk.

Cons. Staples (Neutral): Negative real income and low savings weigh on volumes as pricing power rolls over. Defensive ballast, limited upside absent a growth scare.

Energy (Overweight): Cheap on relative valuation, estimates lagging spot, flows turning. Not a higher-for-longer crude call.

Financials (Underweight): A leveraged growth play just as geopolitics, high rates, and energy inflation bite. Regulatory reform an added overhang.

Health Care (Overweight): Cheap, revisions inflecting, M&A accelerating. Our quality hedge to an AI/momentum unwind — with AI productivity an under-priced tailwind.

Industrials (Overweight): Direct beneficiary of the manufacturing recovery; OBBBA capex strongest in 1H'26. Non-tech capex revisions turning positive.

Materials (Overweight): Geared to the global industrial recovery; firmer goods prices a pricing tailwind.

Real Estate (Underweight): Stabilizing rates only partial relief; office and supply overhang cap the recovery despite strong near-term revisions.

Technology (Overweight): A selection trade, not a beta trade. Revisions near a 2-yr high; pullback a healthy reset; dispersion (89%) rewards monetization. Own quality.

Utilities (Underweight): Full valuation, crowded positioning, low leverage to the capex cycle — relative appeal fades as growth broadens.

Neuberger and FactSet. Data as of June 30, 2026. This material is intended as a broad overview of the portfolio managers’ style, philosophy and process and is subject to change without notice. Portfolio managers’ views may differ from other portfolio managers as well as the views of Neuberger. Nothing herein constitutes investment advice or a recommendation to buy, sell or hold a security. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable.