Global Equity Quarterly: Is Broadening Back?

In a new report from Citi Research, a team of analysts led by Head of European Equity Strategy Beata Manthey offers a new edition of our regular Global Equity Quarterly, taking stock of both fundamental trends and thematic drivers and updating our global equity allocation. We remain constructive on global equities, targeting ~5% upside to mid-2026, but our key worry is that stretched valuations could cap future upside if earnings per share (EPS) fail to deliver.

As part of our quarterly review, we examine three key themes we see as likely to shape equity-market performance in coming quarters. These are:

• the broadening thesis, in which strong EPS growth across regions, sectors and styles leads to a broad-based rally, especially among recent laggards;
• Fed rate cuts, including an examination of how easing policy typically affects both absolute and relative performance; and
• whether the artificial intelligence (AI) theme can continue to underpin market strength, and might also broaden out.

A soft landing, underpinned by Fed easing, should be conducive to market broadening, with Cyclical, Value and small/mid-cap (SMID) leadership. Alternatively, further economic weakness could lead investors toward a “Growth is Defensive” playbook. We settle between the two, maintaining a Cyclical tilt in our global equity strategy that includes being Overweight Continental Europe and Emerging Markets. Key changes to our allocation include lifting Emerging Markets to Overweight and downgrading the UK to Underweight. We think “broadening” could indeed reassert itself, especially into early 2026.

The EPS picture

To step back, equity markets are at all-time highs as debates continue over the impact of tariffs, a slowing U.S. labor market, and the offsetting tailwind from Fed cuts. Interestingly, there’s been relatively little differentiation in regional performance over the past two quarters, with most major indices seeing solid gains. More significant alpha could have been captured via sectors and themes, but even here there’s been differentiation, with Growth outperformance in the U.S. and Emerging Markets and Value outperformance in Europe and Japan. So the question is: What’s next?

Current-year EPS growth forecasts are at +9% for MSCI AC World, rising to +13% in 2026. Bottom-up consensus EPS forecasts for 2025 have been trimmed year to date from +12% but still point to solid growth before next year’s expected acceleration. We expect double-digital growth for the U.S. and Emerging Markets this year, with EPS little changed year over year in Europe and Australia. Next year, solid growth is generally expected across regions, implying a broadening of EPS outcomes. While EPS estimates have been consistently lowered across regions over the past year, of late we’ve seen signs of stabilization. The U.S., UK and Japan have also seen steady EPS upgrades in past weeks.

Our proprietary Global Earnings Revision Index (ERI), which measures the ratio of net upgrades to total revisions, has been sending similar signals. Our global ERI was at “recessionary” lows in April following the Liberation Day U.S. tariff announcements, but has generally been in net upgrade territory since July. European ERI has remained deeper in net downgrade territory than peers, but we expect these downgrade pressures to abate as FX pressures stabilize and the global outlook remains relatively resilient.

Our proprietary What’s Priced In for EPS model shows that market pricing looks more optimistic than bottom-up analysts’ outlooks. This could imply upgrades to bottom-up forecasts, but it sets a high bar should reporting seasons underdeliver. Market-wise, the U.S. looks most bullish for EPS prospects, with continental Europe most subdued.

Valuations and targets

The MSCI ACWI Index has re-rated more than ~15% since April lows and now trades on a 12-month forward price-to-earnings ratio (P/E) of ~19x; current P/Es for the MSCI ACWI reflect it trading at its 92nd historical percentile over the last 25 years. Among major regions, the U.S. continues to look the most expensive at 23x, trading at its 99th percentile. The cheapest major markets in absolute are the UK (13x) and Emerging Markets (14x). Global sectors also look generally expensive; Healthcare (40th percentile) is the only one not trading above average historical valuations. Notably expensive global sectors include Industrials (97th percentile), Real Estate (96th), Materials (94th) and Information Technology (93rd). Global sectors are mostly dominated by relatively expensive U.S. names, but within other regions, relative cheapness can still be found. For example, most Japanese and UK sectors are trading around or below their historical medians.

Our price targets imply continued upside for global equities from here. We see this upside as supported by solid forecasted EPS growth, improving revision trends, and the increasing likelihood of a soft landing. But we worry that stretched valuations could cap future upside if EPS doesn’t deliver, particularly since downside risks to economic growth remain. Looking out to mid-2026, we see the MSCI ACWI reaching 1,230 (upgraded from 1,215), the S&P 500 reaching 6,900, and the Stoxx 600 reaching 600. This implies ~4% gains for the global benchmark through the middle of next year. We upgrade our MSCI EM target for mid-2026 to 1,465 from 1,330; our year-end 2025 target is now 1,375. We also upgrade our FTSE 100 mid-2026 target to 9,700 from 9,300; our year-end 2025 target is now 9,300.

Three key themes

As discussed above, we see three themes shaping equity-market performance.

The first is the broadening thesis. Our expectations for global EPS growth of +9% pace this year masks very different regional outcomes, ranging from double-digit EPS growth for Emerging Markets and the U.S. to contracting earnings in the UK and Australia. Next year we see the picture shifting, with all major regions and nearly all underlying sectors expected to contribute to EPS growth.

This broadening setup is also evident down the cap scale, especially in the U.S. In past years, U.S. SMID has seen very little earnings growth even as large caps have seen earnings grow substantially. But heading into next year, SMID growth is set to outpace large cap peers. The SMID trade has already started to find its legs, aided by easier monetary policy, but it also remains more dependent on economic growth, meaning investors might want to see more evidence that 2026 forecasts can be achieved.

Should broadening of EPS take hold, it should favor Cyclical markets and sectors, with regions outside of the U.S. also having more leverage to this theme.

Fed rate cuts arrive with a key macro debate in the coming quarters: How will the tailwind from the cuts measure up against potential headwinds from tariffs and a slowing U.S. labor market? Downside economic risks remain in place, but a meaningful Fed cutting cycle without an accompanying recession looks plausible. Historically, Fed easing has been a tailwind for a wide set of equity regions (especially European equities), and a catalyst for broadening market performance. Globally, a broad set of sectors tend to fare well on average 12 to 18 months after the start of rate cuts.

Most indices tend to post gains on average 18 months after Fed cuts begin, but if we isolate the three instances where such cuts weren’t followed by U.S. economic recessions — 1984, 1995 and 1998 — performance was meaningfully better than average, with most indices up 30% to 40% over the same period. Such a soft landing should also be conducive to further market broadening, characterized by Cyclical (ex-U.S.), Value and SMID leadership. Alternatively, more economic weakness could lead investors toward a “Growth is Defensive” playbook, marked by continued narrowing into the U.S. and its megacap Tech names.

The third theme is AI, which is back in force this year, as witnessed by the U.S. Mag 7’s 20% gains since April lows. Outperformance has been driven in part by EPS resilience among U.S. megacaps, but leadership hasn’t come solely from U.S. Tech: AI-linked stocks in other regions have kept pace, suggesting the AI theme has broadened to other regions this year.

Solid fundamentals could further support the AI trade. In general, higher valuations among AI-related stocks look justified by higher EPS growth and relatively solid EPS momentum. While the U.S. will remain attractive, there continue to be AI-related opportunities elsewhere. Looking further ahead, the handoff from AI enablers (companies that build the foundation and infrastructure for AI) to AI adopters (companies that integrate AI into their own operations to facilitate tasks) is likely to be the next major transition.