The Shifting Global Allocation Landscape in 2026: US Equities Under Pressure as European Markets Gain Ground

As we approach 2026, the global investment landscape is undergoing a significant realignment, with European equities emerging as a compelling alternative to the traditionally dominant U.S. market. This shift is driven by a confluence of macroeconomic tailwinds, the expanding influence of artificial intelligence (AI) across sectors, and strategic diversification imperatives. Citi's latest research underscores this trend, highlighting how European markets are poised to outperform amid a more accommodative global environment and sector-specific growth catalysts.

The U.S. Tech Conundrum: Strength and Structural Risks

The U.S. equity market, long the engine of global growth, continues to be dominated by the technology sector. According to Citi's CIO office, mega-cap tech companies are projected to account for 53% of S&P 500 earnings growth in 2026. This concentration has created a unique dynamic where the broader market's performance is increasingly tethered to the fortunes of a handful of firms. While this has fueled impressive returns, it also raises concerns about overvaluation and the sustainability of growth in the face of potential policy headwinds and trade uncertainties.

Citi's analysis notes that despite growing fatigue around AI narratives, the sector's fundamentals remain robust, with strong earnings growth and cash flow generation positioning tech as a long-term core holding. However, the overreliance on a narrow subset of stocks has left the U.S. market vulnerable to volatility, particularly as investors begin to question whether current valuations reflect realistic growth trajectories.

European Equities: A Strategic Rebalancing Opportunity

In contrast, European equities are gaining traction as investors seek more balanced exposure. Citi forecasts a constructive environment for the region, with the Stoxx 600 index targeting 640 by year-end, supported by an anticipated 11% earnings per share (EPS) growth. This optimism is underpinned by favorable fiscal policies, geopolitical stability, and the broadening application of AI beyond traditional tech hubs. The European Central Bank's potential rate cuts further enhance the appeal of European assets, creating a more supportive backdrop for equities.

Citi's strategic outlook emphasizes the diversification potential of European markets, particularly in sectors poised to benefit from AI-driven demand, such as industrial suppliers and natural resources. The firm also highlights the role of fiscal tailwinds and global investor sentiment in driving a tactical rotation toward European equities, excluding the UK and Switzerland, as part of a broader regional reallocation strategy.

Macroeconomic Tailwinds and the Case for Diversification

The global macroeconomic environment is shifting toward more accommodative liquidity settings, with Citi projecting that this will support cyclical tailwinds in 2026. For European markets, this means a favorable backdrop for earnings growth and capital expenditures, particularly in AI infrastructure and resource-intensive industries. Meanwhile, the U.S. market faces the challenge of maintaining growth amid potential policy constraints and valuation pressures.

Citi's recommendations for 2026 stress the importance of hedging in weaker, unprofitable segments where stretched valuations offer limited downside protection. At the same time, the firm advocates for geographic diversification, with Brazil emerging as a compelling opportunity to capture AI-related growth through rare earths and commodity-linked sectors. This dual approach-hedging risk while capitalizing on regional growth drivers-reflects a nuanced strategy for navigating the evolving allocation landscape.

Conclusion: A New Equilibrium in Global Markets

The interplay between U.S. tech dominance and European market resilience is reshaping investor behavior in 2026. While the U.S. remains a critical growth engine, its structural imbalances and valuation concerns are prompting a strategic rebalancing toward European equities. Citi's insights highlight the importance of diversification, regional rotation, and sector-specific positioning in capturing the opportunities presented by this shifting landscape. As macroeconomic tailwinds and AI-driven growth continue to unfold, investors who adapt their allocations accordingly may find themselves well-positioned to navigate the challenges and opportunities of the year ahead.