A structural policy pivot in China, US mid-term elections and waning performance from defensive sectors are just some of the events that equity investors should be keeping an eye on as we move into 2026, according to J. Safra Sarasin’s Wolf von Rotberg.
Von Rotberg, equity strategist at J. Safra Sarasin Sustainable Asset Management, has identified five themes that will shape equity markets across different time horizons, warning that historical patterns and valuation anomalies suggest investors should prepare for more modest returns in 2026.
Defensive recovery nearing completion
The outperformance of cyclical sectors versus defensives peaked at the end of September and defensive sectors have outperformed by around 9% since then.
Von Rotberg attributed this shift to a combination of factors, such as the general equity weakness in October and November, doubts over the US’s economic strength and a resurgence of healthcare (one of the defensive sectors alongside consumer staples and utilities).
“Following the strong Q4 rebound, the defensive recovery appears near completion,” he said.
“Sustained outperformance would require further softening of the US cycle and a continued decline in US yields and inflation expectations – scenarios we do not anticipate. Instead, a stabilising macro environment and moderate upside for inflation expectations are more likely, reducing support for defensives.”
Energy sector valuation disconnect
He also argued that the energy sector presents a striking valuation anomaly. At around $63 per barrel, Brent crude remains near its lowest level in over four years but the global energy stocks remained relatively stable in 2025.
Von Rotberg noted that the sector has been flat over the past 12 months despite a 15% drop in Brent prices, and energy stocks are currently trading as if oil were at $100 a barrel, rather than below $65.
“This divergence marks the widest gap between oil prices and energy sector valuations in at least a decade, posing downside risks to the sector,” he said.
AI trade transforms from build-out to built-in
Artificial intelligence (AI) has been dominating the headlines in 2025 but von Rotberg said “the AI trade is not ending; it is transforming”. By this, he means the euphoria that “indiscriminately lifted the entire AI value chain” is changing into a more measured approach towards the disruptive technology.
“The market focus is shifting from infrastructure build-out to adoption and monetisation. While we believe semiconductor demand will remain robust, we foresee increasing competition from proprietary chips of hyperscalers and easing supply constraints heading into 2026,” he said.
“Semiconductor margins – excluding Nvidia – are at typical cycle highs and likely to peak in 2026, limiting the scope for renewed outperformance.”
Different sectors will benefit from this transition. Von Rotberg argued that communication services and software look set to benefit from increasing AI integration and monetisation, which should soon start to show up in earnings and provide a lift to these sectors as soon as next year.
However, the broader economic impact will take longer to emerge as customised products become widely available and business adoption rates rise. But this is likely to be “the last leg of the trade” and only become visible in economic data after 2026.
Mid-term years present historical headwinds
Conventional wisdom suggests that US president Donald Trump only needs to prop up the economy and stock market ahead of next year’s mid-term elections in order to secure victory for Republican candidates. However, von Rotberg said “history suggests that it is rarely that simple”.
Citing data going back to 1945, he noted that equity market gains were typically lower in mid-term election years than in non-election years. US equities have risen by an average of 9% per annum since 1945, yet the average price gain in mid-term years falls to 4%.
“Historical data warrants further caution regarding 2026, particularly given the market’s strong trajectory over the past three years,” he warned.
“If the US equity market holds its value through year-end, it will be only the sixth time since 1945 that the index has risen by more than 75% over a three-year period. In four of those six previous instances, the market declined the following year. The only exceptions – where the market extended that 75% gain – were 1998 and 1999.”
Therefore, it looks like it will be difficult to argue for another year of strong double-digit returns from the US, unless it takes the form of a dot-com-style ramp-up, which he sees as unlikely. His end-2026 S&P 500 target of 7,400 reflects a moderately optimistic view for the months ahead, but is a deceleration from the previous three years.
China's structural policy shift
Chinese equities posted one of the strongest performances in the first half of 2025, then stalled more recently as strong performance was not supported by earnings upgrades. Von Rotberg pointed out that consensus earnings per share for the MSCI China index rose 4% year-to-date, compared with a 30% rise in the index, “leaving most of the heavy lifting to surging valuations”.
The strategist added that one reason why China has failed to generate earnings as strong as other regions is the supply-driven nature of Chinese macro policy. Oversupply and cut-throat competition with wafer-thin margins are the result of heavy state-driven investment into strategic sectors and decreasing domestic demand, meaning the expansion of the industrial base and surging exports failed to lead to significant shareholder returns.
“Yet this may be changing. Recent announcements signal a move towards a more balanced supply-demand framework. First, the government’s campaign against ‘involution’ – destructive competition – aims to arrest the decline in producer prices caused by manufacturing oversupply. A reflection of these efforts is the recent drop in fixed asset investment, the first such decline since 2020,” von Rotberg finished.
“Second, at the Fourth Plenum in October, China’s Five-Year Plan explicitly identified domestic consumption as the primary driver of future GDP growth. This pivot – less supply-side stimulus, more demand-side support – should bode well for domestic manufacturers over the long term.”