Lazard: "Semiconductors Are the Biggest Beneficiaries of the AI Investment Boom... Valuations Remain a Concern"

Global asset management firm Lazard released its "2026 Global Mid-Year Outlook" report on July 1, diagnosing that the U.S.-centered global investment environment of the past 20 years has reached a structural turning point. Lazard identified three key outlooks that will shape global markets going forward: a weakening U.S. dollar, a steeper yield curve for government bonds in advanced economies (rising long-term interest rates), and the relative outperformance of non-U.S. equities. The report analyzed that, as the factors driving the U.S. market's outperformance weaken, it is time to actively consider reallocating capital to emerging markets and Japan.

Ronald Temple, Chief Market Strategist at Lazard

First, the report noted that the ongoing trend of U.S. dollar weakness is likely to persist for several years. With the dollar index already down about 12.5% since early 2025, factors such as U.S. policy uncertainty, concerns about the independence of the Federal Reserve, and an expanding fiscal deficit were identified as additional contributors to dollar weakness. However, the report suggested that investors are more likely to respond by increasing currency hedges rather than immediately reducing their allocation to U.S. assets.

In the government bond market, the report projected a high likelihood of steeper yield curves in advanced economies. The U.S. fiscal deficit is expected to remain at 6-8% of GDP annually over the next decade. Factors such as increased defense and related infrastructure spending by non-U.S. NATO member states, as well as the potential for a Japanese consumption tax cut, are increasing fiscal burdens in various countries. As a result, investors may demand a higher term premium, leading to a rise in long-term interest rates.

The report forecasted that, in this market environment, U.S. exceptionalism will shift, and non-U.S. equity markets will deliver relatively stronger performance. From 2008 to 2024, the S&P 500 consistently outperformed other global indices, but this gap has narrowed over the past year and a half. A prolonged period of U.S. dollar weakness would increase translated returns for non-U.S. assets, while a steeper yield curve in advanced economies would raise discount rates, which is seen as relatively unfavorable for U.S. equities that already face valuation pressures.

Regarding the boom in artificial intelligence (AI) investments, the report took a cautious stance on sustainability. U.S. hyperscalers’ capital expenditures this year are expected to exceed $750 billion, an increase of over 80% year-on-year, and the cumulative investment is estimated to reach up to $10 trillion between 2026 and 2030. However, the report cited the rapid pace of technological obsolescence and the potential for AI to become broadly commoditized over the long term as sources of concern. It noted that the path to achieving shareholder-satisfactory return on invested capital (ROIC) remains unclear.

The report identified semiconductors as the biggest beneficiaries of the current AI investment boom. Hardware suppliers in Korea, Taiwan, Japan, and the United States have achieved explosive sales growth and improved profitability, delivering significant gains to investors. However, from a sustainability perspective, the fact that the Philadelphia Semiconductor Index (SOX) surged over 100% from the beginning of the year to the end of June and that its price-earnings ratio (PER) for the past 12 months has exceeded 60 times suggests that the market may have already priced in overly optimistic scenarios.

The report also reviewed major regional economic outlooks. For the United States, it warned that a resurgence in inflation due to the Iran war, AI-driven employment instability, and a K-shaped economic structure could undermine the quality of growth. In China, the report said that, amid a real estate slump and weakening consumer sentiment, export dependency is on the rise, making structural reforms to boost domestic demand inevitable, though it judged the likelihood of the Chinese government taking such action to be low. In Europe, it projected that economic recovery could be delayed due to higher energy prices resulting from the Iran war, but increased defense spending would support industrial production and technology investment. For Japan, the report predicted that corporate governance reforms would improve capital returns, and that if the Bank of Japan (BOJ) continues to raise interest rates and the yen strengthens, the relative attractiveness of U.S. Treasuries would decline and overseas investment capital could flow back into Japan.

Additionally, the report assessed that equities in emerging markets and Japan could offer better risk-adjusted returns than U.S. stocks. Emerging markets, with their lower valuations, can invest in a variety of growth drivers, including AI, while Japan is likely to see higher ROIC driven by corporate governance improvements, changes in merger and acquisition practices, and domestic support policies.

In the bond market, emerging market bonds—with their relatively low government debt ratios, more orthodox monetary policies, and potential for currency appreciation—could benefit as the appeal of advanced economy long-term government bonds wanes. The report also highlighted that, in preparation for prolonged inflation, real assets such as infrastructure warrant attention, particularly those like toll roads, railways, and utilities that have strong contractual pricing power and limited risk of technological obsolescence.

Ronald Temple, Chief Market Strategist at Lazard, stated, "This does not mean that the U.S. stock market will decline, but I believe the forces that have driven the U.S. market's outperformance relative to the rest of the world are weakening. Investors who are excessively concentrated in U.S. equities should consider reallocating capital to non-U.S. markets that are expected to benefit from attractive earnings growth, a weaker dollar, and relatively lower valuations."

This content was produced with the assistance of AI translation services.