From the studio

CIO Live (Replay): Kurt Reiman and Matt Tormey on US midterms, rates, and the bull market (35 min)
Video: Market Playbook | James Cheo on the new case for Asia credit (6 mins)

Thought of the day

Global stocks snapped their 10-day gaining streak on Wednesday amid ongoing Middle East uncertainty, with the MSCI All Country World index down 0.6%. Renewed concerns over tech valuations also weighed on sentiment, while chipmaker Broadcom delivered a weaker-than-expected sales forecast after the market close. Nasdaq futures are pointing 0.7% lower ahead of the US market open on Thursday.

Any near-term volatility should not come as a surprise after the recent strong rally, as investors react to fresh geopolitical headlines and signs that inflationary pressures may prompt central banks to start a tightening cycle.

But we maintain our Attractive rating on global equities and expect 20% earnings per share growth for the S&P 500 this year, supported by a healthy US consumer and labor market and continued economic growth. Jobs data in recent days and the ISM Services PMI for May pointed to a resilient US economy, while the latest developments in the tech sector underpin solid AI fundamentals.

AI spending is likely to stay high. Google parent Alphabet increased its equity raise to nearly USD 85bn from the USD 80bn it announced earlier this week to help fund its AI spending plans. This move signals to us that AI capex will remain high for some time. It also opens the door for further debt issuance and escalates competitive pressures in the AI race. While rising hyperscaler spending remains an investor concern, it underscores robust AI demand and supports firms exposed to AI hardware and infrastructure.

Compute demand continues to outpace existing capacity. Despite the potential business benefits AI promises, big companies are starting to question the cost of tokens—the basic unit of AI output and how AI companies bill customers. According to media reports, Walmart has capped staffers’ use of an in-house AI agent that helps with workplace tasks, while Uber is limiting each employee’s monthly spending on certain AI coding tools. But we do not see clear evidence of weakening demand, as enterprise AI adoption remains in its early stages and many companies are still ramping up their usage. We think the recent reacceleration of GPU rental prices reflects the depth and durability of AI demand, and hyperscalers’ USD 2tr worth of advance orders in compute resources further illustrates this trend. The growth in consumer agentic AI should offer another driver—Alphabet said Gemini’s monthly active users more than doubled from a year ago, topping 900 million in May.

Growing earnings should help relieve some valuation concerns. The Nasdaq is currently trading at 27x its 12-month forward price-to-earnings ratio, similar to its recent peak earlier this year and above the 10-year average of 25x. While this may suggest limited multiple expansion in the near term, our view is that there is a limited relationship between valuations and returns over shorter-term time horizons. Positive earnings revisions and potential improvement in forward earnings should also help relieve valuation concerns. With consensus estimates pointing to 38% earnings growth in the Nasdaq this year and another 24% in 2027, we see room for the market to move higher.

So, we believe that investors should stay positioned for the long-term growth of AI and recommend a diversified and active approach. In the meantime, we believe the current macroeconomic backdrop warrants a broader stock exposure across sectors and geographies. We favor consumer discretionary, financials, health care, industrials, and utilities within the US, and see opportunities across Asia Pacific and Europe.