A Manufacturing-Led Expansion Takes Over
International stocks have posted much of the same tech-driven growth to start 2026 that has shown up in the US. The difference lies in the leadership. Instead of names like Nvidia and Micron carrying the gains, international performance has been led largely by Korean memory stocks Samsung and SK Hynix.
Global growth appears to be accelerating across the board, and the engine behind that improvement marks a genuine change from the pattern of the last several years. What we are seeing now is a real uptick in the strength of manufacturing. This goes beyond CapEx tied to AI. Manufacturing growth is expanding across most regions and most sectors, which is why the improvement feels so broad rather than confined to a single corner of the economy.
Why the Shift From Services to Manufacturing Matters
The move from services-led growth to manufacturing-led growth carries real implications for how global assets should be allocated, and there are a couple of key reasons why.
The first reason is compositional. When you compare global equity indices to the underlying economies, those indices typically carry a greater degree of manufacturing-centric companies. The US, by contrast, has become a much more services-oriented economy. Global equity markets hold a lot of exposure to the manufacturing sector: energy, industrials, and on the tech side, the semiconductors driving the AI CapEx cycle. Basic materials belong on that list too. Go down the roster of these sectors and you can see the strength of manufacturing showing up directly in corporate earnings.
How Much of This Is AI
A great deal of the manufacturing resurgence ties directly to AI infrastructure spending. The clearest evidence sits in the surge in earnings across the semiconductor space. Semiconductor stocks in emerging markets and in the United States are seeing triple-digit earnings growth this year, driven by a shortage that AI spending has created.
The story does not end there. Strong earnings growth is showing up across the board in the sectors exposed to this build-out. That reaches into classic manufacturing sectors like industrials, extends to energy and raw material providers, runs through the basic material sector, and touches the telecom sector. Utilities are tied to AI as well, given the build-out of the CapEx behind AI data centers. So the strength is quite broad. Yet the concentration, the real muscle in the earnings growth numbers, is definitely tied to that AI CapEx cycle.
The Earnings Boom Is Real, Not Just Expected
This earnings boom lives in more than expectations. It shows up in realized earnings. On a trailing 12-month or 24-month look-back period, some of the strongest earnings growth in a long time has already been booked, the kind of figures you see in mid-cycle dynamics. Layered on top of that realized strength is a set of very strong expectations tied to AI CapEx spend. So both the rear-view mirror and the forward outlook are pointing the same direction.
Why Emerging Markets Have Benefited, and the Concentration Question
The capital spending by the hyperscalers investing in data centers and building out AI is causing a shortage in semiconductors. That shortage drives semiconductor prices to cyclical highs, and those elevated prices drive the earnings of those sectors. This mechanism is a big part of why emerging markets have benefited so much from the AI boom.
A significant share of the expected earnings growth comes from the tech sector and just a handful of semiconductor names. But most of the other bars on the earnings chart are positive too, which means there is genuine breadth to the earnings growth. The issue is scale. The growth on the semiconductor side is so large that it outweighs pretty much everything else.
Concentration in global equity markets can be understood in a couple of ways. The first is the absolute size of certain sectors relative to the broader market. Look at the S&P 500 or emerging markets and you find roughly 40 to 50% of those indices now comprised of tech and communication services sectors, a far larger weight than they have carried historically. On top of that sits earnings concentration, because the earnings growth driving the whole picture comes from those same sectors. So the concentration compounds: big weights and big earnings both flow from the same narrow group.
The Divergence Between Growth and the Consumer
Here is the tension worth watching. Global manufacturing PMIs are expanding while global consumer sentiment is noticeably deteriorating. That raises a fair question about how long a manufacturing boom can persist while the end customer feels economically pinched.
There are certainly limits to how long this capital investment cycle can run. Hundreds of billions of dollars are being spent by just a handful of hyperscalers. Consumer sentiment has been weak for a while, and so far it has not dented earnings growth much. The weakness comes from a combination of factors. Real incomes have stagnated, even though the labor market remains fairly stable at the moment. Inflation-adjusted incomes have started to dip into negative territory, a result of rising input prices and inflation. Survey consumers on the price of food, the price of gasoline, and the price of housing, and the pressure point becomes obvious.
What Happens If the Hyperscalers Pull Back
The scale of the spend is striking. CapEx from just the big five, Oracle, Meta, Microsoft, Alphabet, and Amazon, is approaching 2.5% of US GDP. If those companies decided to rationalize or slow their investment spend in late 2026, it would dampen the global manufacturing expansion, no question.
That risk is real, but the base case does not see it materializing soon. The view in-house is a fair degree of comfort that this spend is not looking like it will fade anytime soon. Looking forward to 2027, there are planned increases to that capital spending. That does not erase the risk to markets, which clearly exists given how elevated expectations have become. There is simply no near-term sign of the rug being pulled out from under this cycle.
