From the studio

Podcast:Investors Club: Fed easing and geopolitics (13 min)
Video: CIO's Devinda Paranathanthri on putting cash to work (2 min)
Video: The China equities rally with CIO's Suresh Tantia (6 min)

Thought of the day

US equities reached yet another record high at the start of the week as investors await the first Federal Reserve interest rate cut of this year on Wednesday. The recent rally has brought the S&P 500 index up 12.5% year-to-date, while the tech-heavy Nasdaq has risen 15.7%.

The latest headlines have added to overall investor optimism. The US-China talks in Spain appear to have yielded positive progress, with the two sides reaching a framework agreement on the fate of TikTok, while a phone call between Presidents Donald Trump and Xi Jinping is scheduled for Friday. A team of US officials is also in India for trade deal discussions after the two countries had been “engaged virtually.”

We maintain the view that US equities have room to rise over the next 12 months as earnings are solid, the growth story of artificial intelligence (AI) is intact, and a series of Fed cuts are on the way.

Solid earnings should underpin further equity gains. Stock valuations have become more demanding following the recent rally, but historically, this has not been a reliable indicator of returns over the next 12 months. In fact, earnings growth and an accommodative Fed have mattered more. For example, despite high valuations, stocks performed well in 1999 and 2021 owing to strong earnings growth and a supportive Fed, while they struggled in 2000 and 2022 as earnings momentum stagnated and the Fed raised interest rates. We expect S&P 500 earnings per share to grow 8% this year and a further 7.5% in 2026, and we do not see any negative catalyst on the horizon that could drive a material derating.

Robust AI growth may offer a further tailwind. China, on Monday, announced an investigation into NVIDIA for potential anti-monopoly violations and began new anti-dumping and anti-discrimination investigations into US-made chips. This came after the US Commerce Department added 23 Chinese entities to its Entity List last Friday. However, market reaction has been muted, with the Philadelphia Semiconductor Index up 1% overnight. Instead, investors have taken cues from the recent slew of positive tech results, which showed sustained and growing AI demand, as well as robust spending commitments and encouraging monetization trends.

Soft-landing Fed cuts have historically been supportive of stock performance. Any lingering doubts that the Fed is on track for a second wave of rate cuts dissolved last week, as data on both labor market and inflation removed potential final impediments. We expect a 25-basis-point cut this week to be followed by three more cuts of the same size consecutively in the coming months, creating a favorable backdrop for the equity rally as lower rates support economic growth and incentivize investment.

Still, with the upcoming rate reduction fully priced in, investors will be watching whether Fed officials push back against market expectations for a series of rate cuts extending into next year. Any hawkish element in the Fed’s statement, Chair Jerome Powell’s press conference, or the staff economic projections could challenge the currently positive investor sentiment and trigger market volatility.

Investors that are underallocated to US equities should consider phasing in or using market dips to add exposure, in our view. We continue to like beneficiaries of transformational innovation like AI, Power and resources, and Longevity.