Trading indices in 2026: My analysis and outlook

Is the era of US market dominance coming to an end in 2026? In this deep dive, Eric Chia explores how shifting monetary policies, AI investment trends, and global fiscal expansion are reshaping opportunities across major stock indices.

As we navigate the opening of 2026, the global indices are characterized by a complex interplay of resilient growth, divergent monetary policies, and a profound shift in the fiscal landscape. 

The dominant theme of "US Exceptionalism" is giving way to a more complex global dynamic we call "The Great Broadening." While the United States remains the primary catalyst for global capital, the sources of growth are decentralizing. The focus is shifting from a narrow set of mega-cap technology firms to a wider industrial and cyclical rebound. This change is fueled by two main factors: the maturing Artificial Intelligence (AI) investment cycle, which is transitioning from infrastructure development to broad industrial deployment, and increased government spending globally. Key examples of this fiscal push include the US's One Big Beautiful Bill Act (OBBBA) and Germany's "fiscal reawakening," set against the backdrop of political uncertainty in the UK and “slowing” GDP growth in China.

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United States: The gravity of elevated valuations

My view on the S&P 500: Year-end target: 7,500–7,700

Different banks' year-end 2026 forecast for the S&P 500, source: cnn.com

Given the market's current conditions, I’m leaning toward the lower half of the consensus range. The earnings growth story is intact—AI monetisation is broadening, fiscal stimulus is a genuine tailwind, and corporate balance sheets remain strong. The S&P 500 is currently trading around 6,8300 after a choppy start to February, essentially a flat year-to-date. I expect the first half to be characterised by range-bound consolidation between 6,800 and 7,200, with the real breakout coming in H2 as rate cuts materialise and earnings delivery accelerates.

AI investment and energy constraints

The "AI Capex Boom" remains the dominant narrative on Wall Street, but the character of this investment cycle is evolving. Crucially, the physical limitations of the AI boom—specifically, electricity generation—have moved to center stage. The power demands of data centers are reshaping the utility and energy sectors, transforming boring defensive stocks into growth proxies. The interplay between AI demand and energy supply constraints is a key thematic driver for 2026, supporting valuations in the "Old Economy" sectors that provide the physical infrastructure for the digital revolution.​

The key risk is an inflation surprise that delays or eliminates Fed easing. If core PCE remains sticky above 2.5%, the multiple compression could easily wipe out earnings growth. I would also flag the growing debate around AI sustainability—the February sell-off driven by AI-related concerns shows how quickly sentiment can shift.

Regional outlook: Europe, UK, Asia, and China

Europe: The valuation catch-up story

Euro Stoxx 50 year-end target: 6,200–6,400

DAX 40 year-end target: 26,000–27,000

European equities are positioned as the contrarian "value" trade of 2026. After years of underperformance driven by energy crises and stagnation, the region is undergoing a structural pivot. Sentiment has shifted from "uninvestable" to "structurally attractive," supported by deep valuation discounts and a decisive shift in fiscal policy, particularly in Germany.

Entering 2026, the ECB has paused its cutting cycle, holding the deposit rate at 2.00% since June 2025. The Governing Council is expected to remain on hold through most of 2026, with Bloomberg survey respondents seeing no change through 2027. In January 2026, Eurozone inflation fell to 1.7%, below the ECB's 2% target, while GDP growth is tracking around 1.2% for 2026.

The Euro Stoxx 50 hit an all-time high of 6,110 in February 2026 before pulling back close to 6,000. The DAX 40 is trading around 24,900–25,000 after a remarkable multi-year rally.

Europe's valuation discount to the US has reached unprecedented levels, and the convergence trade has legs. German fiscal expansion, stabilising manufacturing PMIs, and the ECB maintaining a supportive neutral stance create a constructive environment. European bank stocks, having posted their best year on record in 2025, still have room for re-rating as net interest income re-accelerates and loan growth picks up.

The DAX in particular benefits from Germany's fiscal pivot. DZ Bank's 27,500 target is ambitious but achievable if earnings in industrials, tech, and financials continue to exceed expectations. I expect the 25,000 level to act as a floor, with the DAX working toward 26,000–27,000 as the year progresses.

Key risks include a stronger euro weighing on exporters, political fragmentation in France, and any escalation of US-EU trade tensions. But the structural case—undervaluation, fiscal stimulus, and monetary stability—is the strongest I have seen for European equities in years.

United Kingdom: Breaking through 10,000—what's next?

Year-end target: 10,500–11,000

Illustration of FTSE100 performance over five years.

The FTSE 100 achieved a historic milestone in 2026, breaking decisively through the 10,000 level and reaching a record high of 10,543. The index rose by more than 20% since its April 2025 low, driven by strong performance in banks, pharmaceuticals, and commodity-linked sectors.

The Bank of England (BOE) held rates at 3.75% at its February meeting, with the MPC vote split 5-4. The BOE revised its 2026 GDP growth forecast down to 0.9% from 1.2%, while unemployment is expected to rise to 5.3%. UK CPI hit 3.4% in December 2025, well above target, though Governor Bailey expects inflation to fall toward 2% from April as budget-related energy cost reductions filter through.

The FTSE 100's breakout above 10,000 is technically significant—a barrier that had capped gains for decades. The index's heavy weighting toward financials, energy, and mining has been a tailwind in the current cycle, and the attractive dividend yield continues to draw institutional flows.

However, the FTSE faces a growth problem. With the UK economy barely expanding at sub-1% GDP growth, earnings momentum depends heavily on global conditions and commodity prices rather than domestic strength. GBP’s stability around 1.35 USD has prevented FX headwinds from eroding overseas earnings, but any meaningful appreciation would pressure the index.

I expect the FTSE to consolidate its gains above 10,000, with periodic tests of the 10,500 area. The 11,000 level is achievable but requires continued commodity price support and successful delivery of BOE rate cuts without reigniting inflation concerns. The base case of 10,000 now looks stale, given the index has already surpassed it—I position above consensus at 10,500–11,000.

Japan: The reform rally faces a test

My view on the Nikkei 225

Year-end target: 55,000–58,000

The bull case rests on: 

• Corporate governance reforms—the proportion of companies achieving 8%+ ROE has risen from 37% to 43% since 2022, with buyback volumes roughly doubling.​
• Fiscal stimulus under the Takaichi administration, creating demand across defence, AI, and industrial sectors.​
• Relative valuation—Japan trades at a ~21% discount to the S&P 500.
• NISA inflows and shareholder activism continue to underpin demand.

Japan presents one of the most compelling structural stories in global equities, but the near-term setup demands caution. The Nikkei has run hard, and the forward P/E has expanded from 13x at the April 2025 low to approximately 22x. While this is below the S&P 500, it is stretched relative to Japan's own 10-year average of 18x.

The key risks are yen volatility and BoJ tightening. A sharp yen strengthening would directly hit export-heavy Nikkei constituents—Toyota estimates each rise in USDJPY costs 50 billion in operating profit. The memory of the August 2024 carry-trade unwind, which triggered a 26% Nikkei crash in less than a month, remains fresh.

I expect the Nikkei to consolidate in the 54,000–58,000 range through 2026, with the potential for new highs if earnings growth materializes and the yen remains stable. However, the risk-reward at current levels is less attractive than it was six months ago.

China & Hong Kong: The policy-dependent recovery

My view on Hang Seng and Chinese equities

Hang Seng Year-End Target: 28,000–30,000

CSI 300 year-end target: 5,000–5,200

China enters 2026 with cautious optimism. GDP grew 1.2% quarter-on-quarter in Q4 2025, the fastest expansion in three quarters, beating expectations. The government is expected to lower its 2026 GDP growth target to 4.5%–5.0%, down from "around 5%" in 2025. Deloitte forecasts 4.5% GDP growth, underpinned by more expansionary fiscal policy.

I am particularly watching three catalysts:

The two sessions in March—clarity on the GDP target and consumption-boosting measures will set the tone for H1.

AI and tech sector momentum—Alibaba's cloud and AI business has been the largest contributor to index performance year-to-date, and the DeepSeek breakthrough showcased China's competitive capabilities.

Household deposits as dry powder—Chinese household deposits reached 167 trillion RMB in December 2025. A mere 5% deployment would equal 6% of China's total equity market capitalisation. This represents extraordinary untapped demand.

The risks are well-documented: property prices continue to decline, retail sales growth decelerated to 0.9% year-on-year in December, and US-China relations remain a wildcard with President Trump's scheduled Beijing visit in April. 

My base case positions the Hang Seng between 28,000 and 30,000—above  Morgan Stanley’s base case but below HSBC's aggressive 31,000 target. The upside scenario requires successful policy execution and earnings acceleration; the downside risk is a return to the 24,000–25,000 range if geopolitical tensions escalate or domestic demand fails to recover.

Trading glossary

AI capex boom

The AI capex boom refers to the surge in corporate spending on artificial intelligence infrastructure, including data centers, chips, and cloud computing systems. This investment cycle supports long-term growth but can also create valuation bubbles if returns fail to meet expectations.

Earnings growth

Earnings growth measures how much a company’s profits increase over time, usually reported quarterly or annually. Strong earnings growth often supports rising share prices and higher market valuations.

Valuation discount

A valuation discount occurs when a market or stock trades at lower price multiples compared to peers or historical averages. Investors often view discounted markets as potential opportunities if fundamentals improve.

Multiple compression

Multiple compression occurs when investors are willing to pay less for each dollar of earnings, causing price-to-earnings ratios to fall. This can reduce stock prices even when company profits are rising.

Range-bound consolidation

Range-bound consolidation describes a period when an index or asset trades within a defined price range without a clear upward or downward trend. It usually reflects market indecision before a major breakout or breakdown.

Fiscal stimulus

Fiscal stimulus refers to government spending programs or tax policies designed to boost economic growth. Such measures can increase corporate earnings and support equity markets in the short- to medium-term.

Carry trade

A carry trade involves borrowing in a low-interest-rate currency and investing the proceeds in higher-yielding assets elsewhere. While profitable in stable conditions, carry trades can unwind quickly when exchange rates move sharply.

Re-rating

Re-rating occurs when investors reassess a company or market and assign it a higher or lower valuation multiple. Positive re-ratings often follow improving earnings, reforms, or stronger economic outlooks.

Net interest income

Net interest income is the difference between the interest banks earn on loans and the interest they pay on deposits. Rising net interest income typically improves bank profitability and supports financial sector stocks.

Yield (dividend yield)

Dividend yield measures the annual dividend payment as a percentage of a stock’s price. High dividend yields can attract income-focused investors, especially during periods of economic uncertainty.

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Spreads may fluctuate and widen due to factors including market volatility, news releases, economic events, when markets open or close, and the type of instruments being traded.

Final thoughts

Markets reward preparation—not prediction.

The most important macro theme underpinning this outlook is the unprecedented divergence in central bank trajectories:

The Fed and BOE cutting while the BOJ hikes creates yen strengthening pressure that directly impacts Japanese equities and carry trades. The ECB's prolonged pause supports European equity valuations but reflects an economy growing at just 1.2%. The PBOC's gradual easing supports Chinese risk assets but risks exacerbating yuan depreciation if pursued too aggressively.

The global equity landscape in 2026 is not a single story—it is five distinct narratives converging around a common theme: can earnings growth justify stretched valuations in an environment of diverging monetary policies?

My conviction is highest on Europe and Japan as structural reform stories, with China offering the greatest upside if policy execution delivers. The US remains the anchor of global portfolios but offers the least favourable risk-reward at current multiples.

The fourth year of this bull market will be defined not by direction—which I believe remains upward—but by dispersion. Sector selection, regional allocation, and risk management will matter far more than simply being long the market.

Whether you are navigating the AI-driven rotation in the US, the valuation catch-up in Europe, the reform story in Japan, or the policy-dependent recovery in China, the key is staying informed and adapting to shifting conditions. 

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