From the studio

Video: The China equities rally with CIO's Suresh Tantia (6 min)
Video: Fed rate cuts, jobs and inflation with chief economist Paul Donovan (11 min)
Video: CIO's Wayne Gordon on the gold rally (2 min)

Thought of the day

The Nasdaq index closed at a record high on Monday, driven by expectations for imminent Federal Reserve rate cuts and another round of positive corporate news flow. Tech stocks led S&P 500 sector gains, while rate-sensitive utilities and real estate lagged. With this latest move higher, the S&P 500 is now trading close to 22.5 times forward price-to-earnings (P/E), placing it in the 99th percentile for valuations over the past two decades.

The rise in valuations comes just ahead of Apple’s latest iPhone launch later today. While still closely watched by consumers, Apple’s annual product refresh event has seen its power fade as a broad market catalyst in recent years.

But with the Nasdaq now nearly doubling since the launch of ChatGPT at the end of 2022, we think investors are right to be weighing up what the next big catalysts might be to sustain the tech rally. On this point, we make several observations:

AI and tech fundamentals remain robust. Investors may prefer a dramatic trigger or obvious catalyst, but steady fundamentals frequently drive market gains in their own right. Second-quarter results for big tech were broadly positive, with 81% of S&P 500 companies beating earnings estimates. Forward guidance has held up, and cloud revenues at the largest platforms grew by more than 25% year over year. While the AI them may be maturing, ongoing investment in AI infrastructure continues to support both hardware and software leaders, with Broadcom’s surprise USD 10bn new AI chip order the latest example. We continue to focus on tech opportunities across defensive software and internet industries.

Tech valuations, while higher, may not matter as much right now. Valuations are more demanding than in previous cycles and have remained elevated for much of the year. This is only the fifth time since 1950 that S&P 500’s forward P/E has started above 21x. Yet, history shows that an elevated P/E alone rarely dictates short-term market direction. Our analysis indicates that strong earnings momentum and a supportive Fed are far more decisive drivers. In years like 1999 and 2021, stocks delivered robust gains despite high valuations, propelled by solid profit growth and rate cuts—a pattern we see repeating in the current environment.

Risks to the tech rally appear manageable. While September has historically been a weak month for equities, with average S&P 500 return of minus 2% over the past decade, we think seasonal effects could be blunted this year by heavy tech capital spending and the imminent Fed easing cycle. Recent antitrust rulings have been more favorable for megacap tech, clearing a key tech overhang, and regulatory risks appear contained. Investor sentiment remains cautious, with the latest AAII weekly survey showing net bearish readings increasing nearly 4 percentage points to 43.4%, against a long-term average of 31%.

So, with robust tech earnings momentum and imminent Fed rate cuts ahead, we do not see elevated valuations as a reason to shy away from diversified exposure to the sector. Investors should consider using near-term volatility to build exposure within the AI theme in the defensive software and internet industry, consistent with our current positioning in the AI TRIO, while also balancing tech allocations across baskets of low, medium, and high AI sensitivity. More broadly, we see room for further upside in US equities, with our end-2025 S&P 500 target at 6,600 and end-June 2026 target at 6,800. Within Chinese equities, we continue to see opportunities in China's tech sector, supported by ongoing AI model optimization and chip localization