Global Market Strategist
In Brief
- Asian equities have stabilized after leveraged ETF volatility, as strong 2Q26 earnings support resilient returns and broader participation.
- Higher yields and firmer growth are lifting Asian financials, stronger overseas growth is supporting select discretionary retailers, along with improving shareholder returns.
- Robust earnings delivery and cleaner positioning support further upside, with AI and non-AI upcycles broadening Asian equity momentum.
Asian equities have experienced a turbulent quarter so far. Despite sharp pullbacks in selected markets linked to the unwinding of leveraged ETF positions, market stress appears to have largely stabilized since, and Asian equities have still returned 1.8% quarter-to-date. Robust fundamentals, as evidenced by the 2Q results, provided an important source of support.
More than four-fifths of the MSCI AC Asia Pacific Index’s market cap have reported 2Q26 earnings. According to our earnings tracker1, Asian equities are projected to deliver 87.2% year-over-year (y/y) earnings growth for the period, with the beat-miss ratio standing at 48%-22% relative to consensus expectations. While technology and artificial intelligence (AI)-related sectors remain the primary contributors, momentum in other non-AI sectors is also showing signs of revival, creating a dual tailwind for Asian equities.
Investment implications: Asian equities offer a broadening earnings opportunity, with sustained AI-led growth increasingly complemented by recovering non-AI sectors, in addition to renewed progress in promoting shareholder returns.
AI spillovers and supply chain winners
AI remains a defining earnings driver for Asian equities. Global AI adoption continues to rise while the development of agentic AI is accelerating demand for compute infrastructure. As a result, continuing datacenter build-outs have sustained another quarter of robust semiconductor earnings growth, with aggregate industry earnings more than four-fold compared to just a year ago.
Semiconductors remain the most direct beneficiaries of AI-related capex, as more than 50% of total capex for an AI datacenter (and more than 95% of the content value of a leading AI server) are estimated to accrue to semiconductor chips2. However, there are growing signs that demand is spilling over into other parts of the AI ecosystem, extending beyond foundries and memories, as discussed in the prior Asian earnings note. Whether front-end in the chips layer with silicon wafer, substrate, and equipment names, back-end with advanced packaging, testing, server and rack assembly, or across the infrastructure layer with electronic component and power equipment names, demand has become noticeably broad-based with 80% of Asia’s technology companies recording positive y/y earnings growth.
And as U.S. hyperscalers remain committed to elevated datacenter capex over the next years, whether financed through operating cashflows, equity or debt issuances, a meaningful share of that spending is likely to ultimately flow back to Asia’s technology supply chain. Consensus estimates suggest that this cycle could more than double the sector’s free cash flow, from USD 245billion currently to over USD 633billion by 2028 (Exhibit 1).
Even segments that have historically had limited direct exposure to technology are now seeing incremental revenue support from the physical buildout of AI infrastructure. Machinery companies in Japan and Korea are benefiting from stronger engine and turbine orders as data centers require greater on-site power generation. Chinese battery companies are reporting increased demand for specialized energy storage systems linked to AI data center projects. Traditional metals, such as steel and copper, are also gaining from higher construction activity associated with data center expansion.
That said, the application layer remains a relative laggard in reported results. Most Chinese hyperscalers have reported strong cloud revenue growth and rising adoption of AI products, but elevated capex continues to weigh on near-term cash flows, as investment precedes monetization. However, should monetization begin to catch up with upfront spending, this investment cycle could become a more meaningful tailwind over the medium to long term.
Banks, brands and buybacks
While AI demand was a key driver for technology, industrials, and materials this quarter, selected non-AI sectors have demonstrated equally notable resilience. Comparing on a y/y basis, financials and consumer discretionary stand out, with the next largest share of constituents reporting more than 5% y/y earnings growth this quarter (Exhibit 2).
For financials, the macroeconomic backdrop has continued to turn more favorable. Rising global yields and central bank tightening in an environment of firmer growth have supported local banks’ net interest margins (NIMs), while loan growth has remained broadly resilient. Stronger equity markets have also supported capital markets–related fee income for Japanese and Korean banks. Insurers also benefited from gains in investment income. Notably, recent announcements from Chinese mega-banks to raise interim dividend payout ratios provide an additional tailwind to the sector’s income profile. This strengthens the pass-through from earnings to total shareholder returns, with the current consensus estimate projecting a 3.5% forward dividend yield on the MSCI AC Asia Pacific Financials Index.
Consumer discretionary earnings are also improving. Although much of this strength is concentrated in Japanese equities, the sector’s earnings remain on track to grow 13.5% y/y this quarter, with robust overseas sales acting as a key revenue driver. Japanese discretionary retail and apparel companies, in particular, remain committed to aggressive global expansions through store openings and the extension of product line-up beyond core apparels. These efforts have continued to successfully convert capex into a broader international customer base, with revenue growth further boosted by favorable currency movements, supplementing the more modest domestic growth.
Furthermore, the structural tailwind from corporate governance also remains intact across the broader equity market. From the record KRW 140trillion shareholder return packages by the leading Korean tech names to the record JPY 12.7trillion in share buybacks by Japanese companies in this fiscal year to date, these developments continue to demonstrate renewed corporate commitments to promoting longer-term reforms across Asian markets.
Investment implications
As outlined in the prior earnings note, sustained momentum in Asian equities will increasingly depend on the delivery of earnings expectations. With the robust 2Q26 results, Asian equities have extended their rally further since, despite the intra-quarter volatility. In fact, the unwinding of leveraged ETFs has meant that the current landscape presents a cleaner positioning for exposure in this market. Moreover, as fundamental factors remain supportive, consensus estimates for Asian earnings growth have since revised further upwards to 51.4% and 22.0% for 2026 and 2027, respectively.
While market leadership still resides with a handful of AI-related names, earnings strength is no longer as concentrated as it was before. From the many manufacturing layers exposure to the AI demand to the various cyclical sectors in each regional market, the broadening of earnings strength suggests that Asian equities are emerging as a dual play on both AI and non-AI upcycles. Looking further ahead, with AI-related tax driving record amounts of fiscal revenue in both Korea and Taiwan, the potential for AI demand spillover to households through the fiscal channel (in addition to corporate-led shareholder returns) is increasingly likely, further reinforcing the momentum breadth and duration in Asian equities.