A Shift From Services-Led to Manufacturing-Led Growth
International equity markets have enjoyed much of the same tech-driven momentum that has characterized the United States at the start of 2026. The difference is in the leadership: rather than being driven by names like Nvidia and Micron, international gains have been led largely by Korean memory stocks — Samsung and SK Hynix.
Global growth now appears to be accelerating broadly. What is driving that improvement? The answer marks a genuine departure from the pattern of the last several years. We are now seeing a real uptick in the strength of manufacturing — and crucially, this is not only capital expenditure tied to AI. Manufacturing growth is expanding across most regions and most sectors simultaneously.
Why the Composition of Growth Matters
Why does the shift from services-led growth to manufacturing-led growth matter, and what are the global asset allocation implications of one versus the other? There are a couple of key reasons. First, when you compare the composition of global equity indices to the underlying economy, those indices typically carry a greater degree of manufacturing-centric companies. The US economy, by contrast, has become far more services-oriented. Global equity markets therefore hold a great deal of exposure to the manufacturing sector — energy, industrials, and, on the technology side, the companies at the heart of the AI capital-expenditure cycle. Basic materials belong on that list as well. Running down the sectors, the strength of manufacturing is showing up directly in corporate earnings.
How Much of This Is AI Infrastructure Spending?
How much of the manufacturing resurgence is tied directly to AI infrastructure spending? A great deal of it. This is visible in the surge in earnings within the semiconductor space. Semiconductor stocks — in emerging markets and in the United States — are posting triple-digit earnings growth this year, driven by the shortage that AI spending has created.
But the effect extends well beyond semiconductors. Strong earnings growth is appearing across the board in exposed sectors: classic manufacturing sectors such as industrials; energy and raw-material providers; the basic materials sector; the telecom sector; and utilities, which are tied to AI through the buildout of AI data center capacity. So the strength is quite broad. That said, the concentration of the truly strong earnings-growth numbers is definitely tied to the AI capex cycle.
Which Regions Have the Strongest Outlook?
With earnings expectations booming, which regions have the strongest outlook? Importantly, this earnings boom is not confined to expectations alone — it is showing up in realized earnings. On a trailing 12-month or 24-month look-back basis, we have seen some of the strongest earnings growth in a long time, particularly within mid-cycle-type dynamics. Layered on top of that realized strength are very strong forward expectations tied to AI capex spending.
Why Emerging Markets Have Benefited, and the Question of Dependence
Why have emerging markets benefited so significantly from the AI boom, and is international equity performance becoming increasingly dependent on AI-related demand? A couple of dynamics are at work. The capital spending of the hyperscalers — the companies investing in data centers and building out AI — is causing a shortage in semiconductors. That shortage is pushing semiconductor prices to cyclical highs, and those elevated prices are driving the earnings of those sectors.
On the question of concentration, the significant contribution to expected earnings growth is coming from the tech sector and just a handful of semiconductor names. But it is worth noting that most of the other bars on the earnings chart are also positive — meaning there is genuine breadth to earnings growth. It is simply that the scale of the growth on the semiconductor side is outweighing nearly everything else.
Concentration in global equity markets can be understood in a couple of ways. The first is absolute size: the sheer weight of certain sectors relative to the broader market. Looking at the S&P 500, or at emerging markets, roughly 40 to 50% of those indices are now comprised of the technology and communication services sectors — much larger than has been the case historically. On top of that sits earnings concentration: the concentration that is really driving earnings growth is coming from those very same sectors.
The Divergence Between Growth and the Consumer
There is a notable divergence between growth and consumer sentiment. Global manufacturing PMIs are expanding, yet global consumer sentiment is noticeably deteriorating. How long can this manufacturing boom persist while the end customer is feeling economically pinched?
There are certainly limitations to how long this capital-investment cycle can persist — hundreds of billions of dollars are being spent by just a handful of hyperscalers. Consumer sentiment, for its part, has been weak for a while and, so far, has not impacted earnings growth too much. The weakness stems from a combination of factors. Real incomes have stagnated, even though the labor market remains fairly stable at the moment. Looking at inflation-adjusted incomes, they have started to dip into negative territory. That is because of the rise in input prices and inflation. When you survey consumers on the price of food, gasoline, and housing, these are clearly pressure points.
The Hyperscaler Concentration Risk
The scale of hyperscaler spending is striking: the capex from just the big five — Oracle, Meta, Microsoft, Alphabet, and Amazon — is approaching two and a half percent of US GDP. If they decide to rationalize or slow their investment spend in late 2026, what does that do to the global manufacturing expansion?
It would certainly dampen it — no question. However, the in-house view is that this spend does not look like it is going to fade anytime soon. In fact, looking ahead to 2027, there are planned increases to that capital spending. That is not to say it poses no risk. Given the elevated expectations now built into markets, it clearly is a risk. But there is no expectation of any near-term "pulling out of the rug" related to this cycle.
Summary
The current phase of global growth is defined by a rotation from services-led to manufacturing-led expansion, powered heavily — though not exclusively — by AI infrastructure investment. Semiconductors are the epicenter, with AI-driven shortages pushing prices to cyclical highs and generating triple-digit earnings growth, while breadth extends into industrials, energy, materials, telecom, and utilities. The chief vulnerabilities are two-sided: extreme concentration in tech and communication-services names that now dominate major indices, and a growing gap between robust manufacturing activity and a consumer squeezed by negative real income growth and rising costs for food, gasoline, and housing. Yet with hyperscaler capex approaching 2.5% of US GDP and planned to increase through 2027, the investment cycle — and the manufacturing expansion riding on it — is not expected to reverse in the near term.
