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Market Outlook - May 2026
12/05/2026
A double -digit increase in earnings at the U.S. technology exchange Nasdaq so far this year, compared with flat performance in Germany’s benchmark Dax offers a clear snapshot of how differently regions are being affected by the fallout from the conflict in the Middle East.
Vincenzo Vedda
Chief Investment Officer
Dirk Schlüter
Head of House of Data
Peter Brodehser
- Fondsmanager des DWS Infrastruktur Europa
Overview:
#1 Market & Macro
U.S. advantage – companies deliver earnings surprises
A double-digit increase in earnings at the U.S. technology exchange Nasdaq so far this year, compared with flat performance in Germany’s benchmark Dax offers a clear snapshot of how differently regions are being affected by the fallout from the conflict in the Middle East.
- The apparent resilience of U.S. equity markets is no coincidence. “Earnings growth among U.S. companies in the first quarter was surprisingly strong,” says Chief Investment Officer Vincenzo Vedda. Markets are currently assuming that this trend could continue. The main drivers of U.S. equity performance are familiar ones.
- “The seemingly unstoppable boom in investment in artificial intelligence is currently the key force behind strong price gains in the U.S. market,” Vedda notes. Europe, by contrast, is far more exposed to the consequences of the Iran war, particularly on the supply side
- “We have therefore downgraded Europe to neutral and upgraded the U.S. to neutral,” Vedda explains. In addition to a more favorable earnings outlook, U.S. equities are also receiving support from the prospect of interest rate cuts by the Federal Reserve – even if such moves may not materialize until 2027. In the euro area, by contrast, interest rate hikes now appear more likely.
- That said, optimism is not entirely unclouded. This is evident in the bond markets, which have suffered far more from the Middle East conflict than equities. Yields have risen sharply, while prices have fallen accordingly. Should yields remain at these elevated levels, they could put pressure on the high valuations seen in equity markets. Energy prices represent another risk factor. “They are likely to remain high, as more than ten percent of global oil production is still unavailable to the market,” Vedda says. In addition, global refining capacity has declined.
Topics driving capital markets
Economy: Growth in developed markets likely to slow, but not in China
- Economic growth in the United States is expected to ease somewhat this year, largely due to higher energy prices. Investment activity and consumer spending, however, should continue to provide support.
- In Europe, elevated energy prices are weighing more heavily on demand. Unlike in most developed economies, growth in China is likely to pick up slightly.
Inflation: Prices have risen sharply – no end in sight
- Rising energy prices have also fed into higher inflation in the United States, where the rate most recently stood at 3.5%. In 2026, inflation is expected to remain elevated at around 3.2%.
- In Germany, the cost of living rose by 2.9% in April, up from 2.7% in March. Energy prices were the main driver, increasing by 10.1%. How inflation develops from here will depend crucially on whether – and when – the Strait of Hormuz is reopened.
Central banks: The U.S. and Europe likely to follow diverging interest rate paths
- At its meeting at the end of April, the U.S. Federal Reserve left its policy rate unchanged in a range of 3.5% to 3.75%. Falling interest rates and rising inflation are not compatible.
- The European Central Bank also kept rates unchanged at its most recent meeting. Unlike in the United States, however, we expect a rate hike in the euro area in the coming months.
Risks: Further rises in oil prices, inflation and bond yields
- If oil prices were to remain above USD 110 per barrel for an extended period, this could force central banks to adopt a more restrictive monetary policy, even as economic growth slows.
- Further increases in bond yields could put pressure on the high valuations seen in equity markets.
#2 Equities
AI boom: clear differences from the dotcom bubble
- For a short time, equity markets appeared to take a more critical view of artificial intelligence (AI). But that skepticism lasted no more than a few weeks. AI stocks are now once again driving U.S. markets to ever new record highs. Are these valuations still justified? And are there parallels to the dotcom bubble – the speculative boom in internet and technology stocks in the late 1990s that burst in March 2000?
- To address these questions, investment strategist Dirk Schlüter draws on the so‑called CROCI approach, a methodology designed to make the value creation of different companies more comparable. CROCI stands for Cash Return on Capital Invested. According to Schlüter, the question of whether a bubble is forming does not have a clear-cut answer.
- “Large U.S. companies are far more profitable today than they were 25 years ago.” On the downside, however, lies revenue growth among companies investing heavily in AI. Then as now, investment spending has risen by an average of around 20%. Back then, revenues kept pace. “One key difference between today’s situation and the dotcom era is the significantly higher level of corporate profitability,” he says.
- Today, by contrast, they have increased by only about 10% on average. “What we are seeing at the moment is a bet on the future,” Schlüter says. There is a risk that returns on invested capital could decline at companies with heavy exposure to AI investment. Unsurprisingly, this applies almost exclusively to the United States, where investment volumes are many times higher than in Europe.
- Another risk factor is the shorter economic life of investments today. The useful life of servers, for example, is now between three and six years. In the past, large-scale investments – such as power plants – typically had lifespans of 20 to 30 years. Companies therefore had far more time to generate returns on their capital.
- On the positive side, companies have so far financed the bulk of their investments from their own cash flow. Many questions remain unanswered, to paraphrase a line from playwright Bertolt Brecht – not least whether today’s AI giants will still be leading the field in the medium term, or whether the real winners will be the future users of the technology.
AI‑driven investment boom in the U.S
Ratio of capital expenditure to maintenance investment*
e: expected. Forecasts are based on assumptions, estimates, views and hypothetical models, which may prove to be incorrect.
*Maintenance investment: investment aimed at preserving the functionality or value of existing assets; Sources: CROCI analysis, DWS Investment GmbH; as of 5 Dec 2025.
Equities USA
Companies show exceptional profitability
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Equities Germany
Waiting for de‑escalation in the Middle East conflict
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Equities Europe
Companies may feel supply bottlenecks in the second and third quarters
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Japan
Already strong performance, but further upside remains
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#3 Infrastructure/Fixed Income
Why infrastructure investments can be a valuable complement to equities and bonds
- Recent weeks in equity markets have once again been intense for investors. Almost daily reassessments of the crisis in the Middle East, the Strait of Hormuz, oil price developments and inflation have at times triggered sharp market moves. When it comes to the impact of the conflict on infrastructure investments, infrastructure expert Dr. Peter Brodehser takes a relatively calm view.
- “ The earnings profile of infrastructure assets is often more resilient because it is based on services that are needed even in weaker economic phases,” Brodehser says. In addition, infrastructure investments frequently benefit from natural monopolies, high barriers to entry, government regulation, concessions, and long-term usage or offtake agreements. These factors provide additional stability on the revenue side.
- This is particularly true for infrastructure projects in the renewable energy sector in times of geopolitical uncertainty. “A wind or solar park generates electricity regardless of market sentiment or short-term capital market volatility. A feed-in tariff does not care whether the Strait of Hormuz is currently closed,” Brodehser notes. Unlisted infrastructure, he adds, tends to develop largely independently of traditional equity and bond markets. This is because the valuation of many infrastructure assets is driven more by real economic usage, regulation and long-term contracts than by short-term market sentiment.
- That said, infrastructure investments are by no means immune to changes in market conditions. Rising interest rates, for example, have a negative impact on profitability. However, the extent of this risk depends largely on how aggressively a portfolio is financed. Portfolios with high leverage, variable-rate financing or near-term refinancing needs are naturally far more vulnerable to rising interest rates than conservatively financed portfolios.
- Bonds, particularly in an environment of higher yields, can also be seen as competitors. Yet there are clear differences. “Bonds are important for liquidity and predictable coupons. Infrastructure investors are compensated for providing capital on a long-term, illiquid basis in complex real-economy structures,” Brodehser explains. “In a portfolio, infrastructure can play an important diversifying role — especially when combined with traditional liquid asset classes such as equities or bonds.”
US government bonds (10 years)
Trend towards declining yields
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German government bonds (10 years)
Attractive prospects for German government bonds
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Emerging Market sovereign bonds
Yield opportunities remain attractive
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Credit
Investment Grade
USA | Eurozone |
High Yield
USA | Eurozone |
#4 Currencies
Euro/Dollar: Euro could strengthen further
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#5 Alternative Assets
Gold: The precious metal likely to remain in demand
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LegendThe strategic view by March 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 May 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.