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Market Outlook - July 2026
10/07/2026
The outlook for the stock markets is still good. However, there are question marks about whether the dynamic profit growth in the tech sector, especially in semiconductors, can continue like that.
Vincenzo Vedda
Chief Investment Officer
Tobias Rommel
Portfolio Manager
Thomas Höfer
Head Investment Grade Credit EMEA
Overview:
1. Market & Macro
Equities remain attractive – but questions emerge over earnings momentum
“From our perspective, the outlook for equity markets remains favourable,” says Chief Investment Officer Vincenzo Vedda. This is primarily due to the still very strong growth prospects for corporate earnings.“ However, we are seeing a certain degree of nervousness in the market regarding the sustainability of these elevated profit levels, particularly in cyclical technology sectors,” Vedda explains. One indication of this is the decline in valuations. Earnings forecasts have risen more strongly than share prices in recent months, suggesting that investors are becoming more cautious. Even so, valuations are still far from historically cheap levels. “Despite our positive medium-term outlook, we see some shifts in the relative attractiveness of individual subsectors,” says Vedda.
“We have downgraded the semiconductor sector to Neutral. While we continue to regard it as one of the main beneficiaries of the AI boom, the sharp rally in the SOX Semiconductor Index of around 90% in the second quarter has made us more cautious in the near term.” The semiconductor industry remains cyclical and is significantly expanding its production capacity. Should customers become less willing to maintain current spending levels because the substantial investments fail to deliver the anticipated returns, this could weigh on the sector.
Vedda also believes that investors need to take a more differentiated view of the financial sector, which has long been one of the more positively rated areas of the market.“ As a result of the disruptions caused by the increasing use of artificial intelligence, we currently view financial service providers such as stock exchanges, online brokers, credit card companies and investment banks with caution,” says Vedda. A much more positive picture emerges for the global banking sector. In the United States, banks are benefiting from deregulation; in Europe, from improving returns on equity; and in Japan, from rising interest income driven by higher interest rates.
Topics driving capital markets
Economy: German economy remains weak
- The latest ifo Business Climate Index highlights that the German economy continues to struggle. Although the indicator edged higher in June, it remains below the level recorded before Russia’s invasion of Ukraine.
- The potential consequences of a disruption to shipping through the Strait of Hormuz could create additional uncertainty across Europe. At the same time, government spending programmes — particularly in Germany — are providing a degree of support to economic activity.
Inflation: Prices in Europe and Germany continue to ease
- Inflation in Germany slowed somewhat more than expected. The annual inflation rate declined to 2.3% in June, down from 2.6% in May.
- Inflation also continued to ease across the euro area. The annual rate fell to 2.8% in June, following 3.2% in May
Central banks: Further rate hike in the euro area likely
- Unlike the European Central Bank (ECB), the U.S. Federal Reserve has left interest rates unchanged. We expect the ECB to deliver one additional rate hike over the coming months.
- The future course of U.S. monetary policy under new Federal Reserve Chair Kevin Warsh remains difficult to predict. Warsh has indicated that he intends to provide less forward guidance to financial markets than his predecessor.
Risks: Outlook for the Iran conflict remains highly uncertain
- Should inflation data surprise to the upside again while labour market figures weaken more than expected, economic growth and consumer spending could come under pressure, particularly in the United States.
- Against this backdrop, developments in the conflict between the United States and Iran remain a significant source of uncertainty and are unlikely to fade in the near term.
2. Equities
Semiconductor stocks – how sustainable are the extraordinary profit margins?
Can the spectacular rally in technology stocks, particularly semiconductor stocks, continue? The South Korean KOSPI index, which is heavily dominated by semiconductor stocks, has gained 73 % since the start of the year (as of July 9), despite the recent pullback. By comparison, the performance of the Magnificent Seven, which are investing hundreds of billions of dollars in data centres and artificial intelligence (AI), appears almost modest, with gains of just 13%."The case for a continuation of the rally is that the wave of AI investment remains unbroken and share prices have so far struggled to keep pace with earnings growth," says technology-focused portfolio manager Tobias Rommel. In fact, a historic redistribution of profits is taking place. While the so-called hyperscalers must continue increasing their spending on data centres and AI in order to remain competitive, semiconductor companies have unprecedented pricing power because surging demand is meeting markets that were unprepared for such a rush.
As a result, memory chip prices have risen sharply. In the short term, this trend is unlikely to change. While hyperscalers are grappling with rising costs, semiconductor companies are benefiting from exceptional growth in revenues and profits. Despite the rapid rise in semiconductor share prices, there is little evidence of overvaluation. On the contrary, earnings expectations have increased even faster than share prices, causing price-to-earnings ratios to decline slightly. What remains uncertain, however, is whether this growth and profit margins of up to 50% can be sustained over the long term. There are at least some question marks here. Looking ahead, the key question is how much longer semiconductor stocks can continue to outperform their customers, the hyperscalers. The logic is straightforward: at some point, the billions of dollars invested by Alphabet and its peers will need to generate returns. If they fail to do so, demand for semiconductors could eventually weaken as well. More generally, it may also make sense to focus on somewhat more defensive sectors such as utilities.“ The AI boom is driving a massive increase in electricity demand from data centres, meaning that selected utilities, power-grid equipment providers and energy technology companies could also emerge as structural winners from the AI trend," Rommel says. However, share prices in these areas have already risen significantly as well.
Semiconductor stocks have left the Mag 7 behind
SOX Semiconductor Index performance versus the U.S. Mag 7 Index* in %
*Mag 7 Index: The seven largest U.S. technology companies: Alphabet, Amazon, Apple, Facebook, Microsoft, Netflix and Tesla. Past performance is not a reliable indicator of future performance. Sources: Bloomberg Finance L.P., DWS Investment GmbH, as of June 26, 2026.
Equities USA
On a winning streak thanks to artificial intelligence
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Equities Germany
Stock market prices in reform hopes
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Equities Europe
Strong earnings growth supports equity markets
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Japan
Further upside despite an impressive rally
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3. Fixed Income
Why high-quality corporate bonds remain attractive
“We are very positive on high-quality European corporate bonds (investment grade), even though credit spreads over government bonds are historically very low,” says portfolio manager Thomas Höfer. “Demand remains very strong, and there are currently no reasons why that should change. Despite the record issuance volumes of recent years, demand for new issues continues to significantly exceed supply, which is having a correspondingly positive effect on price performance.
At present, there are no signs that risks among issuing companies could rise materially in the near term. “Traditional credit metrics such as leverage ratios and interest coverage ratios remain at fundamentally solid levels for the broad investment-grade universe by historical standards. There are no indications of an imminent fundamental trend reversal, “ is Höfer’s assessment. This is particularly true for the banking sector, the largest segment of the euro investment-grade market. In previous market cycles, weaknesses in the financial sector often triggered wider credit spreads and, consequently, price declines – bond yields and prices move in opposite directions. Today, however, European banks benefit from exceptionally strong capital positions, substantial liquidity reserves, robust profitability, and very high-quality loan portfolios.
Another area Höfer finds attractive is technology-sector issuers. In particular, the expansion of data-centre capacity for artificial intelligence applications is driving an unprecedented investment cycle. The so-called hyperscalers – Alphabet, Amazon, Meta and Microsoft – are becoming increasingly reliant on external financing as a result of their enormous capital expenditure programmes. These issuers are making growing use of the euro investment-grade market and have already completed several large-scale transactions. Höfer’s conclusion: already low credit spreads could decline even further over the next twelve months, approaching levels last seen before the global financial crisis. Expected total returns of 3.5% over a twelve-month horizon could therefore be viewed as highly attractive, given the strong health of the bond market segment.
US government bonds (10 years)
Still attractive total return prospects
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German government bonds (10 years)
Limited changes expected
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Emerging Market sovereign bonds
Higher risks, higher return potential
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Credit
Investment Grade
USA | Eurozone |
High Yield
USA | Eurozone |
4. Currencies
Euro/Dollar: U.S. growth advantage likely to keep the dollar supported
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5. Alternative Assets
Gold: Limited near-term upside, longer-term appreciation potential
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LegendThe strategic view by July 2027 The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors. Source: DWS Investment GmbH; CIO Office, as of 8 July 2026 | |
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Forecasts are based on assumptions, estimates, views and hypothetical models or analyses which may prove to be incorrect. Past performance is not indicative of future results.