From the studio

Video: Paul Donovan on what next for the Fed (8 min)
Podcast: (18 min)

Thought of the day

US-China trade tensions have dominated headlines in recent days, with the US administration calling Beijing’s expansion of rare earth export controls a threat to the global supply chain, and President Donald Trump saying he might stop trade in cooking oil with China. These remarks came after China sanctioned US units of a South Korean shipping giant and threatened more retaliatory measures in response to US curbs on the Chinese shipping sector.

But US equities have regained some poise this week, recouping more than half of the 2.7% loss sustained on Friday when Trump threatened fresh tariffs on Chinese imports. Treasury Secretary Scott Bessent on Wednesday suggested the possibility of extending the US-China trade truce, and the third-quarter earnings season is off to a good start with solid results from US banks and several tech firms.

Early reporters typically provide a good indication of how the rest of the earnings season will play out, and we expect another good reporting period ahead, which could be a catalyst for US equities overall.

Healthy consumer spending should lead to durable earnings growth. This week, Federal Reserve Chair Jerome Powell noted that the US economy “may be on a somewhat firmer trajectory than expected,” and that “people are spending.” Indeed, job growth isn’t negative, layoffs remain low, wages are rising, and job openings are still at healthy levels. Given consumer spending is one of the most important drivers of both the US economy and corporate profit growth, any data in the earnings season that suggest consumer spending remains resilient should be well received. Encouragingly, initial reports from US banks point to a benign consumer spending environment, and credit card delinquencies have continued to improve.

AI growth remains a key tailwind. ASML this week reported third-quarter orders above market expectations, while TSMC posted a 39% jump in profit for the three-month period. Without taking any single-company views, these results underscore ongoing demand amid strong investment in AI infrastructure. While there are concerns over a potential AI bubble and the “circularity” of some recently announced agreements, we believe tech valuations are underpinned by fundamentals, growth prospects, and earnings/balance sheet quality. With rising AI adoption and solid revenue growth for cloud service providers, we think tech results will confirm that the boom in AI investment spending remains well-supported and the strength of this secular growth trend should continue to drive equity performance.

Federal Reserve rate cuts are supportive of markets. We have reiterated that an easing Fed in non-recession periods generally provides a favorable macro backdrop for corporate earnings. Chair Powell’s comments this week suggest that the US central bank remains on track to cut interest rates further. In remarks this week, while noting the resilience of the economy, Powell pointed to the low pace of hiring and falling household perceptions of job availability, highlighting the risks of a softening labor market. We continue to expect the Fed to lower policy rates by another 75 basis points between now and the end of the first quarter of 2026.

So, we believe the third-quarter earnings season will reinforce our view that the bull market remains intact. We estimate S&P 500 earnings per share growth to modestly improve from 8% in the second quarter to 10% in the third quarter. Investors should ensure they have adequate allocation to equities, especially in areas exposed to transformational innovation opportunities such as AI, Power and resources, and Longevity.