Sailboat in water at sunset

Equity markets continued to record new highs in recent weeks. After a brief sell-off following signs of weakness in the US labor market, stocks resumed their rally amid robust corporate earnings, moderate US inflation data, and hopes for future Federal Reserve rate cuts.

We believe the equity bull market will remain intact. In our base case, we expect an economic soft landing, solid corporate earnings, and lower interest rates to support markets over the next 12 months. 

In this letter, we take a closer look at one of the key drivers of surging markets—artificial intelligence (AI). We argue that while “capex indigestion” is a near-term risk, over the medium and long term, exposure to AI will prove not only additive to portfolio growth but essential to it.

We have also been getting more questions about whether stock markets are currently in a bubble. Valuations are currently at the upper end of historical ranges, and bubbles often coincide with excitement about new technologies. There are also some signs of froth, with meme stocks performing strongly and some IPOs surging in initial trading. 

But investor sentiment is not overly exuberant, in our view, valuations are backed by strong earnings growth, and companies continue to beat expectations. This suggests to us that markets are not in a bubble. And with the Fed likely to embark on a new round of rate cuts in September, we expect US equities to remain supported.

How should investors navigate this environment? With AI potentially set to reshape the economy and markets, we believe that investors should not be out of the market for a prolonged period and underallocated investors should use market dips to add exposure. Broad, diversified exposure to equity markets should enable investors to participate in AI-driven growth, though we see greater opportunities at a single-security and thematic level. 

There are still risks to the near-term outlook, so diversification remains key to managing any setbacks. Ahead of likely Fed rate cuts, we see good value in quality fixed income. We recently increased our price forecasts for gold and continue to see the metal as an effective portfolio diversifier and hedge against political risks. We also expect further US dollar weakness.

This letter also includes an update on our current thinking on cryptos in light of the changing US crypto regulatory environment.

Download the full report (PDF)

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Disclaimer

Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

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