Further equity gains likely amid a supportive backdrop
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
US equities defied continued volatility in precious metals, with the S&P 500 rising 0.5% on Monday after data showed an unexpected improvement in US factory activity. The gain left the index less than 0.1% below the all-time closing high struck last week. S&P 500 futures are up 0.2% at the time of writing. The price of gold continued to swing, jumping 5% at the time of writing on Tuesday, putting it on track for the largest daily gain since November 2008. That followed Friday's decline of 9%, the largest daily fall since 2013, with the metal also losing ground on Monday.
Despite these swings in precious metals, the mood in equity markets on Monday was helped by the ISM manufacturing survey. The index rose to 52.6 in January, from 47.9 in December, marking the first expansion in nearly a year and the fastest pace of growth since August 2022.
The reading was boosted by solid growth in new orders and production, with both sub-indices posting their fastest growth in nearly four years. Order backlogs expanded for the first time since 2022, while export orders also increased. However, the strength in demand partly reflected a deeper contraction in a measure of customer inventories. January is typically a month when businesses restock following the holidays, with some purchases made in anticipation of potential price increases.
Still, the latest data are consistent with a resilient US economy, which we believe will continue to underpin solid corporate earnings growth. Coupled with a Federal Reserve that remains in easing mode and continued growth of AI, we see further equity gains ahead.
Earnings results so far support our outlook for continued profit growth. The fourth-quarter earnings season has been positive, with the breadth of earnings per share (EPS) beats slightly better than historical averages. Good revenue growth has driven a solid median EPS beat of 3.8%, while guidance for the current quarter saw better-than-normal estimate revisions. Consumer spending appears resilient, and some cyclical markets are picking up. We maintain the view that S&P 500 companies are on track for 12% earnings growth for the fourth quarter of 2025, and we expect this growth rate to persist through this year.
The Fed is likely to resume easing by mid-year. Stronger growth data and early signs of stabilization in the labor market have reduced the urgency for near-term easing, with many Fed officials still reluctant to look through tariff-driven goods inflation. But the Fed’s guidance signals a strong inclination to continue lowering rates toward 3%. With Fed Chair nominee Kevin Warsh’s preference for lower rates and the seven permanent FOMC Board voters’ moderately more dovish stance, we expect the US central bank to ease further later this year, when growth moderates and sequential inflation readings move closer to target. We now expect two 25-basis-point Fed cuts by the end of the third quarter, bringing the policy rate range to 3-3.25%.
The structural story of AI should benefit an expanding group of companies. After Microsoft’s cloud revenue growth fell short of expectations, investors are now looking to Amazon’s and Alphabet’s results this week for insights into productivity gains, revenue generation, and margin growth. With continued demand, durable spending, and encouraging monetization trends, we believe AI will remain a key engine of overall equity performance. We also expect beneficiaries to continue to broaden to the application layer of the AI value chain as well as users of the technology in other sectors.
So, we continue to expect the S&P 500 to move higher, maintaining our December price target of 7,700. We recommend investors position for a broadening rally, favoring financials, health care, utilities, and consumer discretionary beyond the tech sector.