From the studio

Podcast: Why we upgraded Chinese equities to Attractive (12 min)
Video: Paul Donovan on what next for the Fed (8 min)
Podcast: (18 min)

Thought of the day

Although the equity bull market is now entering its fourth year, we believe it has further to run. We therefore upgraded global equities to Attractive this month. With equities close to record highs, and the circularity of some AI investments prompting comparisons with the dotcom bubble, why upgrade now?

We see three supportive factors, all of which have shifted in a more favorable direction over the last month:

Fresh momentum behind the AI trend. Recent multi-billion-dollar partnerships between hyperscalers and AI chip firms have strengthened our confidence that AI-related capital expenditures (capex) will exceed expectations and remain robust for longer. AI adoption goes beyond chatbot usage. Anticipation about the growth of agentic AI—AI systems capable of autonomous decision-making and action—and physical AI, such as robots and autonomous vehicles, underpins the commitment at large tech firms to ongoing high levels of capex. We think that over the medium term, even the almost USD 1 trillion of currently planned capex could still fall short of what appears to be needed. We therefore believe that investment growth is likely to continue over the next year.

Supportive US policy. The Federal Reserve resumed its rate-cutting cycle in September, and we see further cuts ahead. Our analysis shows that rate cuts in non-recessionary environments are supportive for equities. For those concerned about bubble risks, an important point of difference between the current boom and the dotcom era is that the Fed was hiking rates in 1999. US fiscal policies—including measures such as capex and R&D expensing, cut­ting taxes on tips, and lighter regulation—should also provide a modest tailwind to cyclical sectors as we move into 2026.

A better US growth outlook. Recent economic data have shown US growth exceeding expectations. This week, Fed Chair Powell recognized this trend, stating that the US economy “may be on a somewhat firmer trajectory than expected” and that “people are spending.” Middle- and high-income households continue to benefit from wealth effects and consumer spending is resilient, which we expect will support corporate earnings. We have raised our US earnings growth expectations for 2025 and 2026: We now expect S&P 500 earnings per share of USD 275 in 2025 (10% y/y growth) and USD 295 in 2026 (7% y/y growth), both a USD 5 increase over our previous forecasts.

So, we think investors should review cur­rent allocations to equities and ensure they are at least consistent with, or modestly higher than, their long-term strategic asset allocation targets. If investors are cur­rently underallocated to equities, we believe they should reallocate excess cash, bond, or high yield credit holdings toward stocks.

We also think that investors should reassess exposures within equities, ensuring adequate focus to our preferred sectors and markets. We prefer areas that are exposed to secu­lar growth, like the US, China, (particularly China's tech sector, which we rate among the Most Attractive sectors globally), as well as global technology, transformational inno­vations ( AI, Power and resources, and Longevity), and pockets with clear catalysts that could drive earnings upgrades (Japan and global banks).

Read more in our latest Monthly Letter, "Wealth in the time of euphoria."