Time to realign: KBI Global Investors Q2 2026 Commentary.

This past quarter marked a turning point in global financial markets. New trends emerged, old patterns were upended, and investors saw shifts in stock market leadership and in the forces driving growth and innovation.

• Major global stock markets posted strong gains this quarter, with Emerging Markets and small-cap stocks leading the way.
• Year to date, our strategies have outperformed their benchmarks (gross of fees), with the Developed strategy ahead by 5.8% and the Emerging markets Strategy by 4.7%. This reflects some of the market shifts, as we have not traditionally outperformed in quarters of very strong performance.
• Technology stocks outperformed; however, the “Mag 7” tech giants lagged, earning the new nickname “Lag 7”. As a result, investors are shifting focus toward smaller, AI-adjacent companies and value stocks further along the AI value chain. Strong earnings growth was seen across many sectors, driven by increased AI capital expenditure and broad-based demand.
• This massive investment in AI, infrastructure, and defence is reshaping market leadership and fuelling long-term growth opportunities. This shift shows the market rotating away from past leaders, with equal-weighted indices outperforming and value stocks showing strong earnings surprises. Concerns remain about an AI earnings bubble, the sustainability of tech sector profits, and the financial strength of big tech firms.

This quarter’s letter examines whether current tech valuations are justified, the risk of circular financing in AI, and the potential for value stocks to outperform.

Even with continued worries about geopolitics and inflation, most major market indices posted strong returns this quarter. The MSCI ACWI Index rose 14.0% in US dollars.

Emerging Markets led the way with a 22.9% return, and small-cap stocks outperformed large caps by 1.5%. Growth stocks outperformed value stocks, returning 17.1% compared to 9.2%. Strong results in semiconductors and technology hardware helped drive these gains, suggesting a change in the technology investment story. Investors are now looking for opportunities among lower-cost, smaller, or later-stage tech and AI companies, and are showing more interest in value stocks further along the AI value chain.

Several key factors shaped the quarter:

• very strong and broad-based earnings growth across the market spectrum
• The increasing scale of AI Capex and its positive impact on the broader economy
• The underperformance of the Mag 7

Returns were strong across many industries and regions, which supports a healthier bull market. Notably, equal-weighted indices and small-cap stocks outperformed, pointing to a shift in market leadership by size.

Source: Soc Gen Investment Research as of 30.06.2026

The Mag 7 has now become the Lag 7.

Although technology stocks led this quarter, the MAG 7 underperformed the broader market, even with continued excitement about AI. As a result, they have earned the new nickname ‘Lag 7.’

Usually, when this group underperforms, it drags down the market indices. But in the second quarter, the broader market still did well, and technology stocks overall performed strongly, even as the Mag 7 lagged. This change points to a shift in which stocks are leading and suggests the market is rotating, so investors may need to rethink where future returns will come from.

There are still concerns about a potential bubble in future earnings and about the financial strength of the MAG 7. Meanwhile, AI-related stocks have benefited as investors look for value further along the value chain. We believe this shift may continue as the market moves into a new phase.

We will look at the difference between earnings expectations for large AI companies, which may be too optimistic, and smaller HALO stocks, where we observe potential opportunities beyond recent positive sentiment.

So far this year, the top-performing sectors in the US are all either directly connected to AI or involved in building data centres that support AI growth.

MSCI USA Sector return YTD to end June 2026

Source: MSCI, LSEG

Is there an earnings bubble?

When we break down performance into earnings growth and valuation changes, only the IT sector among the top four shows a significant increase in earnings. The other sectors did well mainly because investors felt more positive about them, while technology lost some ground due to lower valuations.

MSCI USA Sector return YTD to end June 2026

Source: MSCI, LSEG

Most companies reported good earnings growth in the first half of the year, but investors stayed focused on AI, so other stock valuations held steady or dropped slightly. Even though some worry about a bubble, the overall outlook is not cause for alarm. However, IT growth rates are being projected into the future, even though much of the recent earnings came from one-time or temporary demand.

One important question is why earnings in industrials, energy, and materials did not rise further, despite increased infrastructure spending and investment. In these industries, earnings growth can take time to show up because they often have long order backlogs, and quarterly reports may not reflect all the work that has been committed. So, the growth may not yet be visible in financial statements.

This suggests that some growth expectations may be supported by committed demand. Even if valuations are higher in the short term, the size and length of future opportunities may be underestimated.

Scarcity is now more important than scalability, but its effects show up more slowly.

In recent decades, stock market returns have been driven by software and platform companies with business models that can scale quickly and require few assets. These companies can grow quickly at little extra cost, leading to big swings in quarterly earnings.

HALO stocks differ because building in the real economy faces more constraints, so earnings come in more slowly. For example, data centre developers need to get land, power, workers, permits, and materials, and they usually only recognise earnings after the project is finished, which can take years. The gap between demand and what can be delivered keeps growing, as orders come in faster than the system can handle.

Because these industries tend to show slower earnings growth each quarter, their progress may be overlooked compared to faster-moving sectors.

Another big difference between HALO and tech stocks is how expectations and earnings surprises affect them, especially now that there are worries about a tech earnings bubble and high hopes for AI profits.

Earnings surprises have been much greater for value stocks.

Source: MSCI, DataStream, KBIGI as of 30.06.2026

Looking at value and growth indices over the past year, investors expected much higher earnings from growth stocks (15.9% vs 2.8%), and these stocks delivered more actual growth (21.5% vs 7.8%). But value stocks had much bigger earnings surprises (150% vs 35%). This matters because expectations are already built into prices, while surprises can drive stocks to outperform. Negative surprises lower valuations, while positive ones raise ratings.

Earlier, we talked about HALO (Hard Assets, Low Obsolescence) stocks and the comeback of the physical economy. Given strong macro trends, market impact, and leadership changes, it makes sense to revisit this topic.

Many factors, not just AI, are driving capital spending.

The amount of stimulus is huge, with the US and European governments approving hundreds of billions for infrastructure development. At the same time, big tech companies are investing in AI infrastructure, and countries are bringing supply chains back home, boosting defence, and changing the global energy system.

For example, Microsoft, Amazon, Alphabet, Oracle, and Meta plan to invest $720 billion in AI infrastructure in 2026 alone (note 1), making it the biggest single-year corporate investment cycle ever (note 2). Most of this money will go toward real assets like steel, concrete, and silicon, involving many industrial companies across the supply chain to help realise potential AI-related growth opportunities.

Source: Goldman Sachs Investment Research as of 30.06.2026

These numbers are just part of the potential capital flowing into industry. Companies that are not building data centres are investing in defence production, such as bombs, missiles, and satellites, due to rising geopolitical and technological demands. Military budgets are rising quickly, and some forecasts indicate  this trend may continue through the decade. Even cautious estimates see defence spending reaching $2.9 trillion by 2030 (note 3).

This estimate may increase  if Congress approves President Trump’s request to raise the defence budget to $1.5 trillion, which would be the biggest military spending increase since World War II (note 4). If that happens, other countries will likely boost their own spending too.

Huge Increase in US Spending for 2027?

In January 2026, President Trump proposed a massive $1.5tn defence budget for fiscal year 2027. This would represent a 50% increase over fiscal year 2026, if approved.

Source: Bloomberg as of 30.06.2026

This big jump in manufacturing needs a lot of power. A large amount of stimulus is going to energy suppliers and power grid infrastructure, especially as AI uses more energy. Bloomberg NEF says global grid spending rose 17% year-over-year to $483 billion in 2025 and could exceed $800 billion by 2030 (note 5).

The International Energy Agency expects data centre electricity use to double by the end of the decade. Still, data centres account for a smaller share of global grid investment than electric vehicles and legacy infrastructure. The main question is whether the grid can grow fast enough, which will require significant effort from industry.

Global average annual grid investment to meet the Net Zero Scenario

Source: Bloomberg NEF as of 30.06.2026

These spending plans are not just large—they also have similar long-term growth timelines. Whether it’s AI, defence, or energy, each sector seems set for steady growth over the next decades. Most industrial companies now need to ramp up production to meet large backlogs of orders.

Earnings breadth has started to improve but the lagged nature of earnings delivery in HALO sectors means this can continue to improve over time.

As of 30.06.2026

The bond market is getting more worried about the economy overheating.

Usually, oil prices, inflation, and bond yields move together. But in the second quarter, the link between rates and oil prices broke down, as shown in the chart below.

Oil prices fell while bond yields rose!

Source: Workspace, LSEG, DataStream as of 30.06.2026

This change shows how market stories can influence things. In the second quarter, the story around inflation and yields shifted. Normally, lower oil prices mean lower inflation. Now, markets see lower oil prices as a potential boost to demand in an already hot economy, which might lead to higher inflation.

A strong CPI, solid May job numbers, and a more aggressive Federal Reserve have changed the market story. Reopening the Strait of Hormuz is now seen as a risk for more economic overheating, which could push the Fed to raise interest rates soon. As a result, the idea of ‘higher for longer’ interest rates is back.

US yields have risen across the board, especially for short-term bonds, amid worries about rising government debt, increased bond issuance, and inflation. While the Fed and media debate whether rates will go up, market prices suggest the decision is already made. Higher rates can negatively affect the valuation of long-term growth assets. With so much excitement about growth expectations, any rate increase adds more risk for investors in these positions. On the other hand, higher inflation has usually helped value and cyclical stocks.

Source: Workspace, LSEG, DataStream as of 30.06.2026

Why investors are worried about big tech

Even though Big Tech has reported, and is expected to continue reporting, strong headline earnings, investors are more concerned about the quality and long-term sustainability of these results. Several factors are making people less confident in hyperscalers:

Earnings quality continues to decline.

Cross-holdings have given a big boost to earnings, with much of it coming from one-time non-operating profits, especially from revaluations of AI investments like Amazon/Anthropic and Alphabet’s private-equity holdings. There are also concerns that the way these companies calculate depreciation on their growing asset bases may not align with the short lifespan of most chips, which is only 3 to 4 years.

Balance sheet and capital management quality continue to decline.

These companies used to have low debt, buy back shares, and build up cash. Now, they are spending aggressively on new projects. Because of this, cash flows are expected to go negative, debt is rising, and companies are asking shareholders for more capital.

Source: Goldman Sachs Investment Research as of 30.06.2026

Circular financing is now happening at worrying levels.

One big worry is that some AI investment gains may be linked to valuation rounds shaped by cloud partnerships, infrastructure deals, or strategic financing, which could lead to circular valuations. Here’s how it works:

1. Hyperscaler invests in AI lab.
2. AI lab commits to spending heavily on hyperscaler cloud.
3. AI lab valuation rises.
4. Hyperscaler records investment gain.
5. Hyperscalers also report stronger AI/cloud demand.

This does not necessarily imply that valuations are invalid, but it does create a real risk of counting the same value twice:

The surge in earnings from AI licenses is partly due to cycles, not just long-term trends.

Too much short-term demand during the AI testing phase has made much of the recent earnings growth cyclical rather than long-term. There’s a risk that future earnings expectations are too high because they are based on recent, unsustainable usage.

Overcapacity: The competition from open-source providers is being underestimated.

The US story often ignores competition from Chinese AI providers. There are growing concerns that the gap in sophistication between US and open-source Chinese AI is not big enough to support high earnings growth expectations. While analysts expect US AI companies to have a global market, Alibaba, with Qwen and Kimi K2, already serves over a billion users and is growing its capacity much more cheaply.

Source: UBS Investment Research as of 30.06.2026

The IT valuation dichotomy

Different ways of valuing companies give different results. Looking at forward P/E ratios, Big Tech stocks seem cheaper than before and even look cheap by historical standards. But if you use price-to-free-cash-flow, they look very expensive. Which view is right depends on which method proves more accurate.

As of 30.06.2026

In the end, the main question is whether big AI companies can beat current earnings expectations. If they do, Big Tech could return to its former position. If not, the sector could experience financial challenges if expectations are not met.

Sources:

(1) Motley Fool, 2026 (Big Five: Microsoft, Amazon, Alphabet, Oracle, Beta)

(2) Tech Insider, 2026

(3) Forecast International, 2026,

(4) Center for Strategic & International Studies, 2026

( 5) Bloomberg, 2026

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