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Equity markets shrug off trade and geopolitical uncertainty
The S&P 500 closed at a fresh record high on Friday, for the first time since February, fully erasing losses caused by worries over the prospect of a trade war between the US and its major partners. After the latest advance, the index is now 24% higher than its 2025 low on 9 April, when fears over trade were at their most intense. The rebound has been driven by optimism that cooler heads will prevail in trade negotiations, geopolitical conflicts will not disrupt the global economy, and AI adoption will boost corporate profits.

We believe the rally can go further over the coming 12 months. However, events late last week also underlined that risks remain. On Friday, President Trump said he was cutting off trade talks with Canada and would announce additional tariffs on the nation over Canada’s taxation of US tech companies. Though talks got back on track after Canada rescinded the planned digital services tax, the episode served as a reminder that the success of trade negotiations cannot be taken for granted. Notably, the 90- day pause on higher tariffs on imports from a range of nations is due to expire on 9 July.

Hopes that planned talks between the US and Iran could result in a more lasting peace also suffered a setback. President Trump said he would “absolutely” consider bombing Iran again to stop them developing nuclear weapons, after Iran’s supreme leader said last week’s attacks “did not achieve anything.”

Takeaway: While economic uncertainty and geopolitical risks may generate periodic market volatility in the second half, we believe that the emergence of greater policy stability, falling interest rates, and enduring structural growth trends will provide a foundation for improved market performance in the years ahead. For investors under-allocated to equities, we recommend gradually increasing exposure to diversified global stocks or balanced portfolios to position for stronger potential returns in 2026 and beyond. In our base case, we see the S&P 500 reaching 6,500 by June 2026.

Tech rally has legs amid rising AI adoption
The broad rally in stocks continued to be led by the tech sector. The techheavy Nasdaq 100 also topped record highs from the start of the year and is now up 32% from its April low point.

Despite the scale of the rally, we continue to see a supportive backdrop for the sector, given recent positive trends in AI adoption and monetization. The US Census Bureau’s latest report that tracks AI adoption across 1.2 million firms in the US showed another step-up in companies’ use of the technology, with 9.2% of companies using the technology in the second quarter from 5.7% in the final three months of 2024. This means AI adoption is likely to soon cross the 10% threshold that took US ecommerce 24 years to reach.

This adoption is also broadening across industries, including in the medical field, where it is being more widely used in identifying abnormal tissues from tests. Without taking any single-name views, we believe a peak in overall AI adoption is still a long way off, and accelerating AI use is set to drive further monetization across industries

Takeaway: We continue to recommend a more balanced exposure across the AI value chain, including leading internet and software companies as well as names along the AI semiconductor supply chain globally. We think investors can also gain access to breakthrough innovation and long-term opportunities in AI through private markets. Investors should, of course, consider the risks associated with private markets before investing.

Treasury yields should fall further amid lower rates
Investors pulled nearly USD 11bn from long-dated US government and corporate debt in the second quarter, the fastest pace since the height of the COVID-19 pandemic in early 2020, according to a Financial Times report. This comes as Senate Republicans advanced President Trump’s sweeping tax cut and spending bill over the weekend, with a vote on a long list of amendments to the One Big Beautiful Bill Act (OBBBA) scheduled for Monday. President Trump is pushing to get the legislation over the finish line before the Independence Day holiday on 4 July. The non-partisan Congressional Budget Office has forecast that the OBBBA would add about USD 3 trillion to government debt over the coming decade.

But while the trajectory of US debt warrants careful monitoring, our view is that Treasuries remain attractive, and the 10-year yield is likely to end the year around 4%, versus 4.26% at the time of writing.

Deep US capital markets, the US dollar’s reserve currency status, and the significant wealth held by US households should keep the debt manageable, in our view. The Trump administration has also demonstrated sensitivity to higher bond yields, pointing to a willingness to adjust in the event of much higher yields. A relaxation in banks’ capital ratios on lowrisk assets, announced by the Federal Reserve last week, should support liquidity in the Treasury market. We also expect support for Treasuries from a resumption of Fed easing later this year, most likely starting September.

Takeaway: With yields and cash rates expected to fall for the remainder of this year, we believe high grade and investment grade bonds offer an attractive risk-return compared to cash, as investors can still lock in elevated yields. Long-term investors can also consider diversified fixed income strategies.