Asset watch: What this year’s global stock market dynamics say about how 2026 is likely to pan out

Within the Nasdaq index, some sub-sectors of technology did very well indeed (hardware and AI), while others did poorly (consumer technology and SaaS companies).

The divergence is best illustrated by Nvidia and Alphabet (Google), which represent the AI boom, delivering year-to-date (YTD) returns of 38% and 62% respectively, versus Amazon and Netflix, which represent the consumer-tech segment, delivering only 4% and 9%. Just 14 stocks make up 75% of the Nasdaq 100, ten of which delivered returns of more than 15% over the year, with Palantir leading the pack with its 140% YTD return. Only four stocks—Meta, Netflix, Amazon and Costco—underperformed.

Dig a little deeper and the stocks that did exceedingly well outside the tech sector appeared to be related to the AI boom. For instance, the best performing non-tech stock on the S&P 500 is GE Vernova, with a 130% YTD return that was driven by strong demand for energy from AI data centres.

There are two other main themes. Commodity stocks, particularly of gold-related companies like Newmont Mining (up 148%), did very well with gold hitting its peak price of $4,380 per ounce. Defence stocks, particularly aerospace companies like GE Aerospace (81%), also performed well.

On a relative value trade yardstick from the beginning of 2025, European markets did well, handily outperforming average equity returns in the US. The MSCI European Markets Union (EMU) index has returned about 32% YTD. In simple terms, about 10% of this is because the dollar has weakened and the rest is from local currency returns. In Europe, financial and defence sectors have done well.

The technology hardware boom from the US has carried well into Asia. South Korea is the best performing emerging market (75% YTD), with Taiwan also doing well (27%). Korea’s market concentration of Samsung and SK Hynix (together 43% of its float-weighted index) has meant that the Korean market has benefitted greatly from the hardware trade.

Elsewhere, Brazil has been a beneficiary of the commodities theme and nearly every emerging market from Greece to Mexico has gained from the relative value trade, except Turkey and India. In aggregate terms, the dollar declined 11% against a basket of currencies, the steepest such fall since 1973.

India bucked the global trend this year. Its stock market recorded only a high single-digit return in rupee terms. For overseas investors, this was reduced by the rupee depreciating about 5% against the dollar as a result of market outflows and the central bank’s currency disposition in the face of stiff US tariffs.

The biggest drags on the Indian index were technology services companies led by TCS (down 22% in rupee terms). Despite continual demand for shares generated by mutual funds, India’s stock market did not benefit from either a relative-value calculus or AI-boom-driven international flows.

What does all this portend for 2026? The AI boom and the relative value trade (an end to US exceptionalism) were easy calls for 2025. Most analysts missed the strong performance of gold last year.

For next year, an easy call to make is a continuation of the relative value trade with a deepening beyond the defence and commodity sectors. For instance, there are many non-tech companies in China with strong cash-flow growth and good valuations. Once-in-a-generation fiscal stimulus action in Germany (to be approved soon) and Japan is likely to benefit some sectors in those countries. The dollar will most likely continue to depreciate against a basket of major currencies.

Whether the AI capital market boom will peak and then crash is a much harder call. Valuations are indeed very stretched, with median price-earning ratios even for large companies in excess of 30. However, just four mega-tech firms have a combined annual free cash flow of over $350 billion. Companies that have taken on significant debt for AI plays, such as Coreweave and Oracle, are vulnerable to even a slight dip in outlook. They could well turn out to be canaries in the coal mine.

The AI phenomenon is real, as are revenues and cash flows, but valuations are high. Does this leave us at the end of this boom or merely near the end? Even with elevated valuations, the final stages of a bull market usually yield 30-40% further returns. Long-horizon investors should look for opportunities elsewhere, while speculators may hang on for a bit.

The Indian economy has done surprisingly well; some may even say inexplicably so. A critical question for the year ahead is whether nominal GDP will improve and corporate earnings with it. If so, a double-digit market return in rupees is probable.

In the event of an AI-related global collapse, Indian stocks could offer shelter. But if the world faces a muddle-through scenario without a clear AI peak, then relative value does not augur well for India. On the currency front, unless a US trade deal offers tariff relief, the rupee is likely to depreciate for the Indian economy to shore up its competitiveness.

P.S: The 2026-27 Jovian year in Sanskrit is ‘Parabhava,’ which translates to ‘downfall’ or ‘ruin,’ while 2025-26 is Visvavasu, which means ‘trust’ or ‘belief.’

The author is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand.