Historically, US earnings outgrew the world by 1%. Post-GFC, this widened to 3%. Investors have extrapolated this recent, higher rate as the new normal, pushing the US CAPE ratio to nearly double that of non-US markets. This represents a historically extreme valuation based on a potentially temporary growth advantage.

Unlike previous years dominated by a single theme, 2026 will require a more nuanced approach. Performance will be driven by a range of factors including country-specific fiscal dynamics, the end of rate-cutting cycles, election outcomes, and beneficiaries of AI capex. Investors must move from a single macro view to a multi-factor differentiation strategy.

Contrary to the growth narrative, the MSCI China index returned just 3.4% over the last decade with over 24% volatility. During the same period, the emerging market ex-China index delivered a higher return of 4.8% with significantly lower volatility (17.5%), highlighting structural headwinds in China for investors.

Following a 30-40% valuation surge in 2025, China's market is expected to stabilize. Further upside in 2026 will depend on corporate earnings, projected at a modest 6%, signaling a shift from a valuation-driven to an earnings-driven market that requires a different investment approach.

The current market is not a simple large-cap story. Since 2015, the S&P 100 has massively outperformed the S&P 500. Within that, the Magnificent 7 have doubled the performance of the other 93 stocks, indicating extreme market concentration rather than a broad-based rally in large companies.

Stronger US growth isn't hurting EM currencies because growth is also being revised up globally in places like China and Europe. This prevents a repeat of the 'US exceptionalism' theme that typically strengthens the dollar and pressures EM assets, making the current environment less problematic for EMFX.

International buyers want exposure to high-performing US companies like NVIDIA but are simultaneously hedging against a declining US dollar. They are separating the appeal of American corporate exceptionalism from growing concerns about US sovereign risk and currency depreciation.

Morgan Stanley's 2026 outlook suggests a strong US market will create a "slipstream" effect, lifting European equities. This uplift will come from valuation multiple expansion, not strong local earnings, as investors anticipate Europe will eventually benefit from the broadening US economic recovery.

Significant deviations from baseline global economic forecasts in 2026 are expected to originate from the US. While interconnected, Europe and China are seen as unlikely to produce major upside or downside surprises, making US performance the key variable for global markets.