Lazard Asset Management expects investors to diversify beyond US equities

Lazard Asset Management has published its Global Mid-Year Outlook 2026, which forecasts a structural shift in global investment allocations driven by a weakening US dollar and improving relative opportunities outside the United States.

As chief market strategist Ronald Temple noted, while geopolitical disruptions in Iran continue to dominate macroeconomic headlines, the more consequential shifts remain deeply structural. US dollar depreciation and accelerating questions regarding the long-term sustainability of US competitive advantages are prompting global asset owners to systematically rethink long-held assumptions and explore new corridors of growth outside of the United States.

The institutional macroeconomic outlook is grounded in three core convictions: a sustained weakening of the US dollar as investors reduce outsized exposure to US assets; steeper yield curves in developed markets driven by expanding fiscal deficits; and stronger relative non-US equity market performance as capital migrates toward more attractive asset pricing. To navigate this shifting landscape, global investors are projected to diversify away from US equities, reallocate toward alternative safe-haven assets, and intensify their focus on real assets, particularly infrastructure, as a critical hedge against sustained higher inflation.

"I believe the drivers of US outperformance in global markets are fading, but this is not a call to short the US equity market. What I am making is a bullish relative call on non-US markets, especially emerging markets and Japan, where I see a better risk-reward trade-off than in US equities. In my opinion, investors that have been overweight US equities should consider reallocating capital to markets poised to benefit from attractive earnings growth, a weaker US dollar, and more attractive relative valuations. Outside of the United States, valuations start at materially lower levels, which means earnings growth expectations are much less demanding," stated Ronald Temple, chief market strategist for Lazard Asset Management.

Key regional insights:

Artificial intelligence (AI) valuation and growth sustainability: While AI enthusiasm has propelled markets to historic heights in 2026, the long-term sustainability of this expansion is increasingly under question. US hyperscaler capital expenditure is projected to exceed ~$750 billion in 2026, representing an 80% increase year-over-year (YoY). However, the path to an attractive return on invested capital remains highly obscured, with cumulative global AI investment estimated between $5 trillion and $10 trillion from 2026 to 2030. With the Philadelphia Stock Exchange Semiconductor Index up over 100% year-to-date through late June and trading at a trailing price-to-earnings ratio exceeding 60x, the market appears to be pricing in an excessively optimistic scenario.

China's structural headwinds and consumer stagnation: China’s macroeconomic profile displays underlying fragilities despite reporting a ~5% annual real gross domestic product (GDP) growth rate. An ongoing housing crisis continues to suppress consumer confidence, with private sector data indicating that secondary home prices have declined between ~20% and ~56% across China's top six cities. Temple said that achieving sustainable domestic demand requires addressing extreme structural inequality, specifically reforming the rural-urban retirement benefit gap where 180 million rural citizens receive an average pension of just $34 per month compared to $485 per month for urban retirees.

US economic fragility and wealth polarisation: The underlying resilience of the US economy appears increasingly suspect due to structural fragilities within a K-shaped economy and long-term policy uncertainty. At the end of 2025, total US household net worth stood at $175 trillion, yet the top 1% controlled 31.9% of total wealth, while the bottom 50% held a mere 2.5%. This extreme wealth polarisation limits consumer capacity to absorb prolonged shocks, particularly as the Iran War has replaced tariffs as the primary driver of inflation in 2026, with surging energy prices causing headline consumer price index figures to reaccelerate YoY.

Japan's corporate revival and capital repatriation: Corporate governance reforms in Japan continue to generate tangible results, reflected in higher returns on capital for Japanese corporations. The TOPIX has significantly outperformed the S&P 500 Index since the beginning of 2025, rising 48.2% in US dollar terms through late June compared to the S&P 500's 28.8% return. Conversely, 10-year Japanese government bond yields have risen to 2.7%. Rising short-term interest rates combined with a strengthening Japanese yen could fundamentally upend decades of investing logic for Japanese institutional investors, who currently hold $1.19 trillion in US Treasuries, potentially fueling a substantial repatriation of capital back to domestic markets.

Re-disseminated by Wealth and Society