Stocks favoured despite rising risks

GLOBAL equities are expected to remain a key investment opportunity in the final quarter of 2026, supported by resilient economic growth, corporate earnings and continued spending on artificial intelligence (AI), despite rising bond yields and geopolitical uncertainty.

Investors will need to be more selective, however, as persistent energy-price pressures, tighter financial conditions and the growing cost of financing AI infrastructure could reshape market leadership.

Citi Wealth, Columbia Threadneedle Investments and Schroders expect equities to remain attractive, although their outlooks point to a greater need for diversification, careful stock selection and close monitoring of the bond market as the year draws to a close.

Citi Wealth says five core convictions would guide its investment positioning, including resilient economic expansion, the broadening AI opportunity, the changing role of bonds, more effective diversification and the need for portfolios to adapt as market conditions evolve.

“Good growth does not guarantee easy markets, but it gives investors a reason to stay invested,” it says.

The wealth manager expects the next phase of the AI investment cycle to focus increasingly on companies that can turn heavy investment into stronger businesses and higher earnings, rather than simply benefitting from the initial infrastructure spending boom.

Technology companies account for roughly 40% of the S&P 500’s market value, twice their share in 2022, and drive 53% of expected 2026 earnings growth.

Many AI-related companies have also issued more than US$200bil in combined investment-grade debt to finance further investment.

Higher interest rates, rising infrastructure costs, regulatory pressure and competition from capable open-weight models are increasing scrutiny of the returns generated by each additional dollar invested in AI.

Citi Wealth continues to favour diversified semiconductor exposure and hyperscalers, which have competitive advantages across large language models, data centres and chips.

Semiconductor demand remains strong and exceeds near-term supply, although the outsized returns enjoyed by many AI-spending beneficiaries in recent years are expected to narrow.

“We do not rotate for rotation’s sake or diversify simply to add diversification,” it says.

The wealth manager expects investors to look beyond the most visible AI beneficiaries as differences between winners and losers become more pronounced.

Companies without proprietary data advantages, hardware providers struggling to defend margins and traditional businesses vulnerable to autonomous agents could face greater pressure.

One emerging opportunity is physical AI, which involves deploying AI in manufacturing, logistics, agriculture and transportation.

With 90% of manufacturing tasks still performed by pre-programmed robots, greater adoption of autonomous systems could create opportunities in industrial automation, robotics, sensors, industrial software and advanced machinery.

Cybersecurity is another area where Citi Wealth sees potential as AI adoption expands.

Resilient earnings support sentiment

Columbia Threadneedle Investments also remains constructive on equities, citing stable business surveys, resilient corporate earnings and growth extending beyond AI-related industries.

“Despite geopolitical uncertainty, continued corporate earnings growth should support further returns,” it says.

The investment manager maintains an equity overweight at “mildly favour”, while watching for developments that could justify a more positive or cautious stance.

It believes developed-market monetary policy has tightened but is not yet restrictive enough to prevent economies from absorbing somewhat tighter conditions.

However, inflation remains a key risk, particularly as the prolonged Middle East conflict complicates the outlook for energy supplies and central bank policy.

Although total Middle Eastern oil exports are approaching pre-war levels, exports of refined products such as petrol and diesel, as well as liquefied natural gas, remain below them.

The close relationship between oil prices and bond yields means any improvement in the regional situation could ease inflation expectations and borrowing costs.

Conversely, a prolonged conflict could keep energy prices elevated and put further pressure on markets.

Bond yields have risen to levels not seen since before the global financial crisis, increasing competition for equities.

Nevertheless, Columbia Threadneedle sees an opportunity to add modestly to government bonds as higher yields and steeper yield curves improve prospective returns.

It has moved its government bond allocation to “mildly favour”, while remaining cautious on investment-grade, high-yield and emerging-market bonds because credit spreads are near historic lows, limiting potential capital appreciation.

Two-phased risk for bonds

Schroders, meanwhile, continues to favour equities over bonds, arguing that stronger nominal economic growth remains supportive of corporate profits despite mounting risks.

Looser fiscal policy, AI investment, higher defence spending and efforts to secure supply chains have underpinned the growth outlook.

However, the prolonged conflict in Iran has depleted energy-market buffers, increasing the risk of persistently high prices for oil, fuel and gas.

Schroders says higher bond yields could eventually become the main constraint on the equity bull market, particularly as AI infrastructure investment becomes increasingly debt-financed.

It distinguishes between two phases of bond-market risk.

The first, which it believes markets are experiencing now, occurs when rising yields increase the returns equities must deliver to remain attractive relative to bonds.

Corporate borrowing costs also raise the hurdle for investment projects, particularly in AI, where some data-centre financing deals are yielding 10%.

Despite substantial capital expenditure requirements, hyperscalers retain strong balance sheets from a credit perspective. Investors also continue to see considerable potential in AI adoption, with revenues at hyperscalers and frontier AI laboratories rising rapidly.

The second phase would involve a bond-market selloff driven by concerns over the sustainability of government debt.

Schroders does not believe markets have reached that point, although ageing populations and rising public expenditure could make government finances more vulnerable over time.

A sharper-than-expected inflation shock or a significant slowdown in economic growth could bring those concerns to the forefront.

“We therefore favour equities over bonds but as bond yields rise, the burden of proof is increasing,” Schroders says.

Essentially, investors will need to balance the opportunities in equities against the risks of higher energy prices and borrowing costs.

To maximise returns and minimise risks, they should also spread their investments across different assets and sectors, rather than relying too heavily on AI-related stocks.