GenAM_Focal Point_equity outlook

Equit ies: stay OW through Q2 earnings, but trim exposure

Michele Morganti, Vladimir Oleinikov, and Federica Tartara
21 July, 2026

Your Partner for Progress. Generali Asset Management | Focal Point
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• Equity markets remain supported by resilient global growth, still-favourable financial conditions and solid earnings (EPS) , but the post -rally risk -reward has become less compelling amid renewed geopolitical uncer- tainty, interest rate risks and AI monetisation concerns.
• US earnings are the key anchor to global equities , with strong results in Q1 and Q2 , positive revisions and margins underpinned by pricing power , productivity gains and contained labour costs.
• Corporate fundamentals look sound, also helped by positive free cash flows (after capex needs), moderate leverage and credit spreads alongside ongoing buyback and M&A activity.
• The EU is a laggard, but EPS growth is accelerating. A gradual H2 recovery and Germany's pro -growth policy agenda should provide further support . • A capex super -cycle is underway , driven by substantial investment in AI infrastructure, data centres, semi- conductors, as well as electrification and the energy transition, supporting a broad er range of sectors . AI benefits remain uneven, favouring hardware and infrastructure over software and IT services, while hyperscal- ers face monetisation and capex scrutiny. Chinese AI competition is also on the rise.
• Our 12 -month total -return forecasts are around +5.5% for the S&P 500 and +6% for the EA, with upside to around +16% and +11%, if ambitious IBES consensus estimates prove correct.
• We expect long -term returns to be lower than historical averages , reflecting elevated CAPE multiples and compressed equity risk premia.
• We keep an OW equit y stance , albeit less aggressively, maintaining a cyclical sector bias and adding stronger diversification. Equity dispersion has surged, pointing to greater vulnerability and strengthening the case for broader sector and geographic diversification. Within equities, we are neutral Euro Area vs. the S&P 500 and US Technology; OW DAX, MDAX, Russell MidCap ; and OW EMs, favouring Korea , Poland , slight ly China/China Tech and tactical ly Indonesia.

Despite the Iran conflict, the global macroeconomic backdrop remains steady, and is likely to improve in 2H26 if, as we assume, the re -escalation in Iran is contained . Emerg- ing markets (EM) have shown greater resilience than in previous war episodes. The Euro Area is the weak spot, but stabilising sentiment , resilient domestic demand , solid labour markets, accumulated savings and ongoing fiscal support provide some cushion .

2 Generali Asset Management | Focal Point Germany’s recently agreed reform package provides an additional medium -term tail- wind. Regulatory easing, including the European Commission’s call to relax bank lever- age ratio constraints, and a more flexible EU competition policy should also support M&A and investment activity over time. This ma cro mix keeps the baseline constructive for equities, while the main risk scenario remains a broader geopolitical shock that would hit energy prices, confidence and margins.
Earnings dynamics at the centre of equity resilienc e and positive returns
Profit growth is the key pillar supporting equity markets. In the U S, Q1 EPS rose by around 27% year -on-year, with a high share of companies beating expectations. This triggered sizeable upward revisions, reinforcing the constructive outlook for 2026.
The earnings recovery has also broadened : our median -stock analysis points to US earnings growth accelerat ing to 13.3% in Q1 2026 from 9.5% in Q4 2025, while beat ratios improved as well . This signals a healthier earnings backdrop and suggests the recovery is extending beyond a narrow group of market leaders . Q2 is expected to deliver another strong reporting season. US EPS growth should remain in the high -20% YoY range, led by Technology, while the rest of the index should contribut e around 9 pp. Early guidance has been strikingly positive, pointing to a solid earnin gs read -out, although el- evated expectations may limit the scope for positive surprises. In Europe, profit momen- tum also improved in Q1 . Positive surprises and revisions broadened beyond Energy and Tech into Industrials, Materials and Banks, pointing to a healthier profit cycle. EU EPS growth is set to accelerat e to 12–14% YoY in Q2 , supported by sustained upward revi-

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3 Generali Asset Management | Focal Point sions and leaving scope for modest positive beats. For 2026, we expect EPS growth of 18.5% in the US and 11% in EMU, still 4% and 7% below consensus , respectively . Profitability Drivers
Corporate fundamentals remain sound , especially in the US. Balance sheets are healthy, with moderate leverage, strong interest coverage and ample liquidity. Cash flow generation continues to exceed investment needs, su staining M&A activity and share- holder distributions through buybacks. That said , the US net offering — buybacks minus IPOs — has turned less supportive due to a sharp rebound in IPO activity . As long as macro and financial conditions, together with EPS momentum, stay supportive, this should be manageable for the US . The EU and Japan, in contrast , still show little evi- dence of net offering pressure versus history, which strengthens their diversification ap- peal within equity portfolios.
Solid corporate p rofitability is underpinned by several structural factors. Since the pan- demic , companies have strengthened pricing power and enhanced supply chain resil- ience . At the same time , labour cost pressures remain manageable, and technology investment s have lifted productivity . Structural tailwinds from lower corporate tax
rates and supportive financial conditions have helped sustain elevated profit levels. More over, large US fiscal deficits and higher fiscal spending in the EU and Japan con- tribute to good corporate profit momentum.

3.04.05.06.07.0 2010 2013 2016 2019 2022 2025 US EUNet debt/Capex, Non Financial corporations Source: LSEG Datastream, GenAM calc. 05001000150020002500300035004000 1999 2004 2009 2014 2019 2024US cash flows US capexUS financing gap Source: FRED eco data, GenAM calculationsbl$ 2030405060708090100 1999 2005 2011 2017 202350500 US corporate IG, bps, log scale US corporate: (fin. liab minus liquid asset)/profits, rhs Source: LSEG, GenAMDot ComGreat Financial Crisis Covid TariffsCredit spreads reflect strong fundamentals

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4 Generali Asset Management | Focal Point A further tailwind comes from a developing capex super -cycle , driven by sizeable in- vestment in AI infrastructure, data centres, semiconductors, electrification, the energy
transition and related sectors . The US is setting the pace , while Europe remains held back by structural bottlenecks , notably regulatory complexity, energy availability and cap- ital allocation efficiency. This divergence is likely to widen regional profitability and growth gaps . At the same time , AI adoption is broadening beyond the US, creating spillovers across a wider range of regions and sectors.
Still, the scale of AI capex creates execution risk : benefits remain uneven ly distrib- uted across the value chain. ardware and “pick -and-shovel” beneficiaries look better supported, while IT services and software names have yet to prove that AI adoption can translate into sustained revenue growth and margin expansion (see right chart above) . Conversely, scrutiny is highest for the five hyperscalers. heir sharp capex increases are set to weigh on near -term free cash flow, while funding needs are shifting more visibly toward debt and equity markets. lthough ’s long -term E potential remains compel- ling, the timing and scale of returns remain uncertain . his raises the risk of overinvest- ment, lower incremental returns and a more selective view on winners. ower-cost Chinese models add another risk, as corporates seek to reduce technology spending
and challenge the economics of more expensive large language models s .
Market Outlook
US v aluations remain well above historical norms on a long -term view, while Europe and E Ms look less stretched. Near term, however, high margins, positive revisions and strong earnings momentum still support valuations . Given the risks discussed above, US equities — especially technology — entered this phase from relatively low PE levels ver- sus norm , with subsequent profit upgrades further improving fair value estimates . In the short -term, both the S&P 500 and US Tech look undervalued, as strong relative profit momentum versus other regional indices and low valuation (PE) versus economic trend (index of macro surprises ; see left chart below ) partly offset AI concerns. Moreover, unlike the five Tech hyperscalers, the 23 largest US Tech stocks show a much healthier free - cash -flow trend for this year and next (see right chart below).
EMs offer the most attractive valuation profile , supported by stronger growth and favourable EPS revisions. Europe looks more balanced, helped by lower multiples and potentially fewer headwinds from the strong trade -weighted euro , while the US delivers stronger profit growth but at demanding valuations.

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5 Generali Asset Management | Focal Point Our 12 -month total -return forecasts are around 5.5% for the S&P 500 (target 7,700) and 6% for the Euro Area , with upside to around 16% ( 8,800 ) and 11% , if IBES consensus estimates prove correct.
However, a longer -term perspective argues for more cautio n. US equities appear structurally expensive, as indicated by elevated CAPE multiples (nearly 40X) and com- pressed equity risk premia. AI EPS may be running ahead of trend, with rising competi- tion and capex needs challenging future margin expansion and valuation. As a result, expected long -term returns are likely to be lower than historical averages : around 6.5% vs. 10 -12% over recent decades .
Slight OW Equity , favo uring a diversified allocation
Despite the recent rally, Iran -related tensions and rising AI doubts, we stay OW equi- ties, but less aggressively , with a cyclical sector bias and stronger diversification. Eq- uity dispersion has surged, while rotation has triggered a sharp drawdown in momentum strategies this month. The main shift has occurred within IT, where semiconductor stocks have entered a bear market after a massive Q2 rally. Dispersion does not necess arily signal a correction, but it often points to greater vulnerability and strengthens the case for broader sector and geographic diversification.
We keep t he Euro Area neutral versus the US and US Tech , while staying OW DAX and MDAX on German reforms. Despite risks, the US, including technology and US Russell Mid Cap , could keep benefit ing from strong profit momentum. EMs remain over- weight, with Korea and Poland preferred . We add a tactical OW in Indonesia , where excessive underperformance, attractive valuations and limited MSCI downgrade risk cre- ate a buy opportunity, despite weak policy visibility. We retain a slight OW in China and China Tech: attractive valuations, light and rebuilding investor positioning , policy support and rising AI-led competitiveness offer upside, while lingering property weakness and geopolitic al risks, includ ing US tariff retaliation , argue for only a modest OW.
Sector -wise, we keep a cyclical tilt in Europe . We overweight banks, diversified finan- cials, consumer services, capital goods, materials, and selected tech areas such as soft- ware and semiconductors. Among defensives, we favour Pharma. We remain under- weight Energy, Staples, Real Estate and Hardware . We favour complementing core exposures with thematic allocations, including AI ben- eficiaries beyond the hyperscalers , and commodit y-related strategies such as a US gold - stock basket (price /earnings at 50% discount to history) and nuclear/uranium , which add portfolio balance and exposure to structural demand trends.

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6 Generali Asset Management | Focal Point Conclusion
Equities remain supported by resilient global economic growth, firm earnings momen- tum and healthy corporate fundamentals . AI is the dominant structural theme, driving a broad capex cycle. Still, elevated US CAPE multiples, compressed risk premia and high mega -cap concentration leave little room for disappointment , while rising equity disper- sion points to a more fragile market backdrop and reinforces the need for broader sector and geographic diversification . We therefore keep a slight equity overweight , but we pair it with strong er diversifica- tion.
Our 12 -month base case points to upside of around +5.5% for the S&P 500 and +6% for the Euro Area . In the upside scenario, these returns could rise to +16% and +11%, if IBES estimates are met. Beyond that horizon, stretched US valuations and compressed risk premia argue for below -average long-run returns.
The m ain risks to our constructive view are a severe escalation in geopolitical ten- sions , especially in the Middle East, which could lead to a sustained energy shock, weaker -than-expected growth in Europe and Asia , and higher -for-longer interest rates . The latter would challenge current valuations, especially in growth sectors (Tech, Sta- ples, Pharma , etc.).
An additional market -wide concern is that AI-related investment fails to deliver the high returns currently expected , while large -scale US capex programmes could face tighter financing conditions and increasing competition .

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Head of Research: Vincent Chaigneau
Head of Macro & Market Research: Dr. Thomas Hempell, CFA

Team: Elisabeth Assmuth | Research Operations
Elisa Belgacem | Head of Cross -Asset Quant & Dev,
Senior Credit Strategist
Jakub Krátký | GI CEE Financial Analyst
Michele Morganti | Head of Insurance & AM Research,
Senior Equity Strategist
Vladimir Oleinikov | Senior Quantitative Analyst
Dr. Thorsten Runde | Senior Quantitative Analyst
Dr. Florian Späte, CIIA | Senior Bond Strategist
Guillaume Tresca | Senior Emerging Market Strategist
Dr. Martin Wolburg, CIIA | Senior Economist
Paolo Zanghieri, PhD | Senior Economist
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