From the studio

Video:Sundeep Gantori on AI adoption's steady growth (3 min)
Podcast: Investors Club: Can the China AI rally continue? (5 min)
Podcast: (17 min)

Thought of the day

Federal Reserve Chair Jerome Powell on Tuesday flagged the lack of a “risk-free path” for US monetary policy right now, highlighting the continued challenge of balancing inflation risks against a softening labor market. Powell, speaking at a chamber of commerce event in Rhode Island, noted the challenge, stating “near-term risks to inflation are tilted to the upside and risks to employment to the downside.”

After a well-anticipated September rate reduction, the next Fed decision is set for 29 October. Money-market pricing and the Fed’s own dot plot point suggest another quarter-point cut is likely, though opinions among other Fed policymakers remain divided. Vice Chair Michelle Bowman this week called for decisive rate cuts to support a fragile job market, while regional Fed presidents have urged caution, with Chicago’s Austan Goolsbee warning that inflation remains nearly a percentage point above target.

Powell’s comments on this tension and policy flexibility saw US equities slip from record highs, while Treasury yields dipped and gold steadied near its own record highs close to USD 3,765/oz.

While the Fed may face a careful balance of risks in charting its path forward, we see little reason for investors to stay on the sidelines, with solid opportunities evident across several asset classes:

Medium-duration bonds offer attractive returns. We expect the 10-year US Treasury yield to trend lower as economic growth slows, making quality bonds appealing. Yields remain elevated relative to the past decade, and initial yield levels have historically signaled strong longer-term returns. Bonds not only provide robust income and help dampen portfolio volatility, but also offer potential capital gains if the slowdown deepens. Meanwhile, cash returns are likely to diminish as rates fall and inflation erodes purchasing power. Over five-year periods, bonds have outperformed cash 82% of the time, rising to 90% over 20 years.

Gold can rally higher as real rates decline. Gold is up more than 40% year-to-date and is holding just shy of its record high, buoyed by both Fed easing expectations and US dollar weakness. We estimate exchange-traded fund (ETF) holdings will approach 3,900 metric tons by end-2025, near previous records. Falling real interest rates, now at their lowest since 2022, add to gold’s appeal, especially if inflation remains sticky. As the US dollar likely weakens further, gold’s negative correlation with the greenback should add another leg of support.

The Fed path and macro conditions could lift equities. Historically, Fed easing outside of a recession has supported stocks, and we see further gains ahead, driven by AI, earnings, and resilient consumption. S&P 500 profits grew 8% in the second quarter, with broad-based strength—nearly 80% of companies beat sales estimates. We expect EPS growth of 8% in 2025 and 7.5% in 2026, with robust AI capex and steady consumer spending underpinning the outlook. Retail sales have risen for three consecutive months, and we estimate that global AI investment is set to grow 67% in 2025 and 33% in 2026.

So, we view the Fed’s easing cycle as broadly supportive for equities, quality bonds, and gold, and we continue to recommend a whole-of-portfolio approach when putting cash to work. Ongoing US labor market softness should allow the Fed to cut rates further: We see 25bps in cuts at each meeting through January 2026, bringing rates down by another 75bps from current levels. We think quality fixed income could also offer some downside protection if growth were to slow further. In our base case, the S&P 500 should trade near 6,800 by June 2026, with a bull case outcome closer to 7,500. We recommend phasing into equities and using any market dips to add exposure to preferred sectors, such as US IT, financials, health care, communication services, and utilities. We think the rally in gold has more room to run, with spot prices likely to hit USD 3,800 per ounce by end-2025 and USD 3,900 per ounce by mid-2026.