From the studio

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)

Thought of the day

US equities fell on Tuesday amid renewed concerns over elevated valuations, with the S&P 500 down 1.2% and the tech-heavy Nasdaq sliding over 2%. The declines—the biggest in nearly a month—came as Wall Street chief executives warned of potential selloffs during a financial summit in Hong Kong, and as efforts to reopen the US government stalled. The shutdown has now become the longest in US history.

But some consolidation should not come as a surprise, in our view, especially after a strong run over the past several months. While political uncertainty and shifting investor sentiment could inject further volatility into the market, we continue to believe that the fundamentals supporting the rally remain intact. We offer several perspectives for investors to consider as they navigate the markets ahead.

High valuations do not necessarily signal an imminent correction. There is no doubt that equity valuations are above average, but stocks rarely fall simply because valuations are high. Instead, declines are more likely when corporate profit growth disappoints, with forward returns more correlated with changes in earnings expectations over the next 12 months. Results from the current earnings season have been solid, with both the breadth and magnitude of earnings beats so far exceeding historical averages. We forecast S&P 500 earnings per share to grow 10% this year, and see upside to our expectation of a 7.5% growth next year. Additionally, we believe current valuations are justified, as the increased weighting of higher-multiple sectors—such as IT—in equity benchmarks should help sustain higher valuations.

The tech sector’s core metrics remain robust. On valuations, the 12-month forward price-to-earnings ratios for today’s tech giants are far lower than those at the peak of the dotcom bubble—currently around 30 times, compared to over 70 times for market leaders in 1999 and 60 times for the Nasdaq overall. On fundamentals, leading companies continue to report stronger-than-expected demand for AI compute and services, while maintaining robust cash positions and balance sheets. With increasingly complex AI applications driving further demand for computational resources, we have recently raised our projections for global AI capital spending over the next five years, and believe that this should fuel continued gains in AI-related stocks.

Keep a long-term perspective and remember your overall investment outlook. Investing is likely a long-term endeavor for many, so we believe it is essential to focus on one’s personal financial objectives and stick to an investment plan when challenged by volatility. Having a portfolio mix that is right for an investor’s objectives and regularly rebalancing throughout the market cycle can help one stay disciplined and avoid the temptation to chase performance or exit the market during periods of stress. Additionally, short-term returns tend to skew our perception of risk and reward, making us more susceptible to making emotional decisions.

So, we maintain the view that the equity bull market has further to go, and believe under-allocated investors should add exposure to transformative trends including AI. We also encourage investors to maintain a well-diversified portfolio across equities, fixed income, alternatives, and gold to help manage risks effectively.