Strong equity rallies should not deter investors

Podcast: Signal over Noise with CIO Americas Ulrike Hoffmann-Burchardi, previewing the week ( Apple, Spotify)
Podcast: Jumpstart: How will markets digest US tech earnings, Fed rate cut, and Trump-Xi talks?
Video: Insights on big tech earnings, NVIDIA’s GTC, and the surge in AI deals (4 min)
Video: Paul Donovan on FOMC and Trump-Xi trade talk takeaways (7 min)
Podcast: What’s next for Chinese equities and the USD? (12 min)

October ended on a strong note, with major stock indices posting gains for the month despite the flare-up of US-China trade tensions. The S&P 500 has now risen six months in a row, and the MSCI All Country World has gained for seven straight months—the longest winning streak for both indices since 2021.

Concerns over high valuations persist, and the Federal Reserve’s policy outlook appears murkier amid the ongoing US government shutdown. But despite the strong gains in equity markets this year, we continue to believe that this bull market has room to run and investors should position to benefit from the rally.

Strong earnings results and outlook should fuel further gains. Megacap tech results last week confirmed accelerating demand for cloud services and AI compute, offering some reassurance to investors that rising capital spending is likely to be rewarded over time. Importantly, it’s not just the tech firms that are doing well—the breadth and magnitude of earnings beats across the S&P 500 companies that have reported so far have exceeded historical averages. With company revenue in aggregate on pace to grow more than 7% for the third quarter, S&P 500 earnings per share growth for the three-month period should come in at about 12%, better than our initial expectations of 10%.

Valuations have little relationship with returns over the following year. We have highlighted that valuations have historically been a poor predictor of 12-month returns, as the strength of earnings growth and the outlook for Fed rate cuts are more important drivers. In addition, sectors with higher valuations, such as IT and communication services, now comprise a larger share of equity benchmarks compared to 20 years ago. If we assumed the same weights as 20 years ago, the forward price-to-earnings (P/E) ratio of the MSCI All Country World Index would be closer to its long-term average. The P/E ratios for today’s tech giants are also far lower than for the tech firms at the peak of the dotcom bubble.

Fear of losses can lead to underperformance. The probability of seeing a loss on any given day is just under 50%, but losses have been much less common for longer time horizons. For example, stocks (i.e., the S&P 500) have never experienced a loss over a 20-year period, and a balanced, well-diversified portfolio’s gains are even more consistent. This means that short-term returns can skew our perception of risk and reward, making us more susceptible to making emotional decisions. Additionally, while fear of investing at the wrong moment can be paralyzing, missing long-term trends can be far more damaging to one’s portfolio than enduring short-term drawdowns.

So, investors should not be fearful of the strong performance and should continue to position to benefit from further gains ahead, in our view. Participation in transformative trends is often essential for long-term wealth preservation and appreciation, so we continue to favor our Artificial intelligence, Power and resources, and Longevity themes.