From the studio

Podcast: Signal over Noise with Ulrike Hoffmann-Burchardi.
Podcast: The weekly Jumpstart on tech results, the Fed, and gold.
Podcast: CIO's Giovanni Staunovo on Russia sanctions, gold outlook (8 min)
Podcast: Why we upgraded Chinese equities to Attractive (12 min)
Video: CIO's Delwin Limas on circular AI deals and bubble concerns (5 min)

Thought of the day

US equities overcame recent volatility to notch new record highs on Friday, after consumer price index (CPI) data for September offered reassurance to markets that the Federal Reserve is on track to cut interest rates this week. Monthly price increases were below August’s pace, while annual readings came in lower than expected.

The “preliminary consensus” reached between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng over the weekend also set the stage for a potential breakthrough at the anticipated Trump-Xi summit this week, boosting investor sentiment further. Japan’s Nikkei 225 crossed 50,000 for the first time on Monday, while S&P 500 futures are pointing 0.8% higher ahead of the US market open.

With companies having reported strong third-quarter results so far amid a favorable backdrop, we expect US stocks to rally further in the coming months. Indeed, all three key drivers of market performance—earnings, monetary policy, and investment—are currently supportive.

The Fed’s policy easing indicates a favorable macro environment. The benign inflation reading underscores why we think the macro environment is favorable, as softer-than-expected price pressures likely cleared the way for the Fed to proceed with additional rate cuts. Data going back to 1970 shows that the S&P 500’s average annualized return was just below 10%, and it rises to 12% when the US economy is not in recession. But investors enjoy the best returns (15%) when the economy is not in recession and the Fed is cutting rates. In our view, evidence will continue to filter through that the labor market is weakening, providing justification for further rate cuts through the early part of next year. But even when the Fed stops cutting interest rates, the economy will likely continue to grow, suggesting that the performance of US stocks should still be well supported.

A strong start to the third-quarter results suggests solid earnings growth. Companies that represent about 25% of the S&P 500’s market capitalization have reported their third-quarter earnings, and the results have been solid. Not only is the percentage of companies beating sales and earnings-per-share (EPS) estimates higher than the historical average, but the magnitude of the beats is also larger. Based on the strong start, corporate profit growth is on track to exceed our initial estimate of 10% for the three-month period. Additionally, while there is still a clear bifurcation between higher-income and lower-income consumers, spending overall remains resilient, according to comments from banks and consumer companies. Looking ahead, we expect big tech companies to also report strong results this week amid growing AI demand.

Strong demand for computational resources should underpin robust AI capital spending. The recent series of AI deals announced by OpenAI underscores how the industry has underestimated the rise in the consumption of AI tokens, the small units of data that large language models use to process and generate output. Token consumption reflects the cognitive workload of an AI system, and we believe demand for computational resources will continue to accelerate with higher usage of AI services. For example, weekly active users for ChatGPT have soared to 800 million—nearly 10% of the global adult population, from just 300 million at the start of this year—while average message volume per user has climbed further. AI videos are also token intensive—with a 10-second clip potentially requiring over 100 times more tokens than a short paragraph, based on our estimates, due to frame-by-frame processing and consistency checks. With AI browsers rapidly emerging as a new competitive frontier, the surge in AI token consumption should continue to underpin strong AI capex trends.

So, we maintain our Attractive view on US equities, forecasting S&P 500 to reach 7,300 by June 2026. Underallocated investors should consider adding exposure to our preferred areas, including the Transformational Innovation Opportunities of AI, Power and resources, and Longevity.