From the studio

Podcast:Dirk Effenberger discusses how investors should deal with geopolitical risks and political upheavals (9:57)
Video:Sundeep Gantori on AI adoption's steady growth (3 min)
Podcast: (17 min)

Thought of the day

US equities are on track to post the first weekly loss since the start of September as investor worries over high valuations coincided with a reassessment of the prospect of rapid interest rate cuts from the Federal Reserve. The announcement of a fresh round of tariffs has also capped risk appetite.

President Donald Trump announced a 100% duty on branded or patented pharmaceuticals starting 1 October, unless a company is building a manufacturing plant in the US. Imported heavy trucks, upholstered furniture, kitchen cabinets, and bathroom vanities will also be subject to levies between 25% and 50%.

Investors will also be watching the core personal consumption expenditures (PCE) price index due today for further insight into inflation trends. Higher-than-expected price pressures could see markets recalibrate their expectations for the Fed’s easing path ahead, especially as the US economy is holding up well with relatively limited layoffs.

Following the recent strong run, a period of consolidation in equities should not come as a surprise, in our view. We offer several perspectives for investors to consider as they navigate the markets in the weeks and months ahead.

High valuations historically have not been a clear signal for returns over the next 12 months. The S&P 500’s 12-month forward price-to-earnings ratio recently hit a high of 22.9 times. Valuations are generally a function of the macro environment, and they have little relationship with near-term returns. Instead, earnings growth and Fed policy have mattered more historically. For example, despite high valuations (the S&P 500 started the year with a P/E above 21x), stocks performed well in 1999 and 2021 owing to strong earnings growth and a supportive Fed. In contrast, stocks struggled in 2000 and 2022 as earnings momentum stagnated and the Fed raised interest rates to slow down the economy. In our view, the macro backdrop this year remains supportive, and we do not see any negative catalyst on the horizon that could drive a material derating.

Large pharmaceutical companies should see limited impact from the tariffs. Levies on the pharmaceutical sector have been well telegraphed over the past several months, and many large companies have increased US manufacturing investments to mitigate tariff exposure. Details of the latest tariffs remain scant, but we expect limited impact at this stage given the exemptions. Swiss, Japanese, and Australian drugmakers, for example, have sizable manufacturing footprints in the US, or are expanding their US capabilities. Additionally, the recent EU-US trade agreement includes a 15% tariff ceiling on pharma exports to the US, while Indian pharma companies largely operate in the generics space, which is not covered by the latest tariff announcement. Elsewhere, we note that the US market only accounts for a small, single-digit percentage of sales revenue for a few leading Chinese companies.

Drivers for our Longevity theme remain intact. Ultimately, we anticipate the end US policy implementation will skew toward avoiding any sharp rise in domestic drug costs. With significant downside risk already priced into the health care sector, efforts to manage or resolve the policy risk could improve sentiment and drive a rerating from current depressed levels, in our view. More broadly, we believe aging populations and increased demand for products that can expand healthy lifespans (including in areas like obesity, oncology, and medical devices) should drive above-average growth for companies exposed to these shifts.

So, we maintain a positive outlook for US equities, which should continue to be supported by favorable fundamentals and transformational innovation themes. Investors looking to manage timing risks should consider phasing in and using market dips to add exposure to our preferred sectors, including IT, communication services, financials, utilities, and health care.