Phase into equities

At times of heightened uncertainty, a core investment strategy is essential to keep financial plans on track through volatility. This means either building a well-diversified portfolio or maintaining a target long-term asset allocation, staying disciplined despite market swings.

In the current environment, investors should consider gradually increasing allocations to a diversified core portfolio, or deploying excess cash into equities or bonds to realign with long-term targets. Phasing (or dollar cost averaging) into markets—i.e., investing a fixed amount each month—can help manage behavioral biases and reduce regret risk.

Tactically, we believe current conditions favor a phased approach. We see limited returns until end-2025 and expect US and EM equities to outperform Europe in the near term. Earnings growth in the US and EM should outpace that of Europe, supported by the resumption of Fed rate cuts (and more than from Europe), while short-term sentiment appears to be more positive on Europe relative to the US, providing greater scope for a surprise. Given the risk of a weaker US dollar, we recommend expressing these views on a currency-hedged basis.

In 2026, we see scope for further equity gains as policy stabilizes, structural earnings growth continues, and US rate cuts likely resume. Our base case sees the S&P 500 reaching 6,500 by June 2026. Gradually putting cash to work now can help position portfolios for stronger future returns.

In the US, we see the strongest performance coming from the technology, health care, and financial sectors:

Technology: AI investment and adoption remain key drivers. Despite concerns about a slowdown, first-quarter earnings, and management commentary confirm that supportive trends are intact, and we see a long runway for AIdriven growth. While potential semiconductor tariffs later this year could introduce some volatility, the sector remains high quality and continues to generate the highest return on capital across all sectors.

Health care: We rate the sector as Attractive. Policy clarity, compelling current valuations, and upside to earnings estimates for select companies should drive a rebound. Promising new therapies in large, untapped markets—such as obesity and Alzheimer’s—should help offset patent expirations. We believe the sector’s defensive characteristics can also provide ballast if the economy slows.

Financials: We now also rate the sector Attractive. Easing regulation, early signs of a pick up in capital markets activity, and improving net interest margins and income should support a recovery. Ongoing growth in payments, driven by digital adoption and robust transaction volumes, adds further momentum. We believe these positive trends, alongside solid fundamentals, position the sector well for the months ahead.

Taiwan: Global AI trends remain supportive, with recent deals highlighting broadening demand. We expect MSCI Taiwan earnings growth of 8% in 2025 and 9.5% in 2026. Current valuations are attractive, with additional tailwinds from strong AI revenue growth (+45% CAGR over five years), easing geopolitical concerns, and rising pricing power.

India: India is well positioned to strike a trade deal with the US before the 90-day pause ends. We expect earnings per share growth to accelerate from mid-single digits to low- to mid-double digits for FY26 and FY27.

Mainland China tech: We continue to favor mainland China’s tech sector. The latest earnings season saw beats on both top and bottom lines, highlighting strong monetization and profit engines. We expect these trends to persist, with current valuations not fully reflecting the robust earnings growth prospects we forecast for the sector (+30% in 2025-26).

While the backdrop in Asia has become more constructive with tariff de-escalation reducing tail risks, we believe much of the optimism is already priced in. Further upside may be constrained by where tariffs settle, residual policy uncertainty, and the sharp valuation recovery to date.

While we expect the US and Asia to outperform, there are still attractive areas within European equities:

European quality: We rate European quality stocks as Attractive. Recent underperformance has brought valuations back below their 10-year average (MSCI Europe Quality), creating a more appealing entry point. These companies’ strong profitability, resilient earnings, and solid balance sheets make them well suited to a late-cycle, volatile environment. Historically, quality stocks have outperformed during periods of slow growth and uncertainty, and much of the direct tariff risk now appears priced in. We see a compelling risk-reward for broad-based exposure at current levels.

Six ways to invest in Europe: We also see value in companies benefiting from market volatility, post-election policy shifts in Germany, increased defense and cybersecurity spending, the rebuilding of Ukraine, and global firms with limited trade risks. A diversified approach across these topics can help investors navigate Europe’s more challenging outlook. For more, see our “Six ways to invest in Europe” list.