From the studio

From the studio
Video: Buy equities on dips: Opportunities in a rate-cut environment (8 min)
Video: CIO Monthly – Kiran Ganesh on the AI rally and navigating market highs (3 min)

Thought of the day

The S&P 500 rose 0.2% on Wednesday, hitting a fresh record high ahead of NVIDIA's quarterly results. The US chip-maker reported strong results for the quarter that ended on 31 July, with both revenue and profits exceeding consensus estimates. However, as investor expectations were elevated ahead of the release and data center revenue came in slightly below forecasts, shares fell over 3% in after-hours trading. At the time of writing, European stock markets are trading broadly higher on Thursday, while S&P 500 futures point to a slight 0.1% decline at the open.

The firm’s guidance for the quarter that ends in October also exceeded forecasts, coming in at USD 54 billion +/- 2%, relative to estimates of USD 53.23bn. Notably, this guidance does not include any potential revenue from H20 chip sales.

NVIDIA continues to advocate for US government approval to sell its next-generation Blackwell chips in China, emphasizing their commercial use and broader economic benefits. While H20 chip sales remain excluded from the October quarter outlook due to ongoing geopolitical uncertainty, management indicated that resolving these issues could unlock USD 2-5bn in additional revenue for the quarter.

The overall strength of the July quarter results may offer some reassurance for investors after signs of stalling momentum for the large-cap tech rally. Without taking any single-company views, we see several implications for equity investors:

The outlook for large-cap tech remains compelling. Second-quarter earnings for big tech have been robust and broad-based, with most companies beating both sales and EPS estimates. Forward guidance has also held up, and cloud revenues at the largest platforms grew by more than 25% year over year in the June quarter. We recently raised our global AI capex forecasts for this year and next to USD 375bn and USD 500bn, respectively. NVIDIA's management stated during the earnings call that it anticipates USD 3-4 trillion in AI infrastructure spending by the end of the decade . Overall, we expect global tech earnings per share growth of 15% this year and 12.5% in 2026.

Valuations are higher, but sentiment doesn’t appear overly bullish. Valuations are currently at the upper end of historical ranges, with the S&P 500 forward price-to-earnings ratio close to 22.5x. Still, several measures of sentiment appear less euphoric. A recent American Association of Individual Investors’ survey showed bearish sentiment. Institutional positioning also appears cautious, with Morgan Stanley data showing that megacap tech stocks are more underowned relative to their S&P 500 weightings than at any point in the past 16 years.

A weaker US dollar offers a tailwind for S&P earnings. As with other sectors, tech earnings have benefited from the sharp decline in the US dollar from its early 2025 highs. Historically, every 10% decline in the US dollar has translated into a roughly 2.5% increase in S&P 500 profits. We see more room for the US dollar to decline from current levels, with the Federal Reserve’s easing cycle set to resume next month—investors are pricing for around 135bps of US rate cuts by the end of next year—and as other structural drivers pull it lower. A weaker greenback will likely continue to boost year-over-year profit growth for the rest of the year.

So, we remain confident in the equity outlook and forecast the S&P 500 at 6,800 by June 2026. We think broad, diversified exposure to equity markets should enable investors to participate in AI-driven growth, though we see greater opportunities at a single-security and thematic level. We do recommend investors seek a more balanced exposure across the AI value chain, with a preference now for laggards that offer a more attractive risk-reward tradeoff. Alongside the tech sector, we favor the health care, utilities, and financials sectors within US equities.

In Europe, we recommend Swiss high-quality dividends, European quality stocks, European industrials, and our “Six ways to invest in Europe” theme. In Asia, we like China’s tech sector, Singapore, and India. Structured investments, such as capital preservation and put-writing strategies, may help investors take advantage of any near-term volatility.