The first half of 2026 offered a useful reminder of why investors should be wary of chasing the latest narrative.
Markets spent much of the past six months worrying about the conflict in the Middle East, resurgent inflation, and the prospect of a more hawkish United States Federal Reserve. Yet, global equities climbed higher, supported by resilient corporate earnings and an economy that has proved far sturdier than many had expected.
The second half will undoubtedly bring fresh concerns. The more important question is whether they will be enough to derail the bull market.
Our answer remains no.
Artificial intelligence remains central to the investment story.
The world’s largest technology companies, the hyperscalers, remain fully committed to their spending plans. AI-related capital expenditure is expected to rise by almost 70 per cent in 2026 to around US$820 billion (S$1.06 trillion), before approaching US$1 trillion in 2027.
These are extraordinary sums, and they come at a cost: consuming an increasing share of mega-cap technology companies’ free cash flow. But they are also being deployed into an environment where demand for AI compute continues to outstrip supply. Rental prices of graphic processing units (GPUs) – important in AI, where they power the training and deployment of large language models – have accelerated again, while supply bottlenecks persist across many parts of the tech hardware ecosystem.
Crucially, these investments are beginning to generate accelerating returns. Major cloud providers reported around 40 per cent growth in cloud revenues in the first three months of 2026, while some US$2 trillion of advance orders for compute resources should support even faster growth in the quarters ahead.
We continue to favour the suppliers to the spenders of the AI boom. In particular, we see strong demand visibility, pricing power and earnings momentum across the “picks and shovels” of the AI build-out – from semiconductor equipment and memory to power infrastructure and grid electrification. These trends should continue to support markets such as the US, South Korea, Japan and Taiwan.
That said, the next phase of the AI story is unlikely to be determined by spending alone. It will also depend on the pace of monetisation.
Today’s investment cycle is unusually concentrated. Unlike past industrial revolutions where thousands of firms independently drove capital spending, the current digital infrastructure build-out hinges on the capital allocation of a handful of hyperscalers and frontier AI developers.
That concentration has been a strength. Deep balance sheets and strong cash flows have allowed these firms to invest far ahead of demand. But it is also a vulnerability. If shareholders begin to question whether returns justify ever-rising capital expenditure, spending could slow much faster than markets expect.
For investors, the next chapter of this bull market will hinge as much on revenue monetisation as on capital expenditure.
The market is also no longer just about AI and hyperscalers.
Mega-cap tech stocks have lagged the broader market in 2026, while the percentage of stocks outperforming has risen to 50 per cent. The equal-weighted S&P 500 Index has also caught up with its market-cap-weighted counterpart, and the healthcare sector has outperformed the S&P 500 on more than 70 per cent of the days when the benchmark fell by 1 per cent or more.
This broader performance reflects a robust US economy, supported by fiscal policy, strong credit creation and, importantly, a resilient but not overheating labour market. Non-farm payroll growth has been at a pace needed to keep unemployment broadly stable, wage growth at 3.4 per cent year over year is comfortably below its long-run average of 4 per cent, while retail sales growth of 6.9 per cent in May continues to be a testament to the strength of consumer spending.
Taken together, the data points to an expanding US economy that does not generate enough wage pressure to force the Fed to tighten aggressively. If oil prices remain under control as the US and Iran continue to advance their peace talks, we believe headline inflation in the US likely peaked in May. The bar for the US central bank to hike rates, therefore, is high.
This backdrop should continue to support earnings beyond AI, enabling the rally to broaden further. Improving manufacturing activity should benefit industrial companies, resilient consumers should underpin discretionary spending, and healthcare’s recent performance suggests it deserves a role beyond simply providing portfolio defence.
Meanwhile, Asia’s opportunity set is also becoming broader.
Lower oil prices should support a recovery across the hardest-hit South and South-east Asian markets, particularly in airlines, industrials, real estate and financials. Japan’s structural reform story remains intact and should continue to attract investors seeking exposure to both the global AI supply chain and a cyclical recovery.
China’s leading internet platforms are beginning to demonstrate that AI adoption can translate into tangible revenue growth, a trend we expect to become more visible later in 2026 as new AI agents are rolled out. Beyond technology, continued investment in electrification, power infrastructure and the energy transition should create opportunities across healthcare, power equipment and industrial materials.
The foundations of this bull market remain intact: resilient earnings, continued technological investment, improving market breadth and a healthy macroeconomic backdrop.
Investors should, nevertheless, keep a close eye on several risks. Chief among them are the durability of AI capital expenditure beyond 2027, a sharp rise in long-term bond yields and the durability of the US-Iran ceasefire. Higher valuations and rising single-stock volatility also argue for greater selectivity and broader diversification.
Staying invested remains the right strategy. But the next phase of this bull market will require more than simply owning yesterday’s winners. It will reward investors who broaden their exposure, focus closely on company fundamentals, and build portfolios diversified across sectors, regions and themes.
The bull market is not over. But it is becoming more demanding.
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The writer is the Asia-Pacific head of UBS Global Wealth Management’s Chief Investment Office.
Source : https://www.straitstimes.com/business/the-bull-markets-next-test
