From the studio

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Thought of the day

Risk sentiment has lost some steam this week as investors reassess AI optimism, the Federal Reserve policy outlook, and ongoing geopolitical uncertainty. S&P 500 futures are pointing 0.6% lower ahead of the US market open on Friday, potentially stopping the benchmark from posting a 10-week gaining streak.

One key for markets today will be the monthly US employment numbers. Consensus estimates point to an 85,000 increase in nonfarm payrolls in May, down from April’s addition of 115,000, and an unemployment rate that stays at 4.3%.

We maintain our Attractive rating on US equities and expect the S&P 500 to reach 8,200 over the next 12 months. Our view is that the key drivers supporting the market in recent years remain intact and a diplomatic solution to reopen the Strait of Hormuz should eventually emerge.

There remains room for the Fed to cut interest rates as current policy is modestly restrictive. Data this week has pointed to a resilient labor market—available positions in April were well above market expectations, according to the Job Openings and Labor Turnover Survey (JOLTS), while ADP data showed that private-sector job growth in May exceeded economists’ median estimate. Initial jobless claims rose for the week ending 30 May, but continuing claims fell. With May’s ISM Services PMI showing the strongest activity in three months, markets continue to expect the Fed to raise rates by this time next year amid inflation risks. However, we believe that the bar for a hike is high. While the Fed is likely to remain on hold in the coming months, we still expect its next move to be a cut amid slowing wage growth and moderating price pressures.

Sustained AI demand should underpin further equity gains. Tech stocks came under pressure in recent days amid renewed concerns over valuations. Broadcom’s lower-than-expected AI chip revenue outlook and a report from SemiAnalysis that suggests a potential decline in memory demand also weighed on sentiment. But demand for AI tokens, the basic unit of AI output, has continued to exceed supply even after recent years of heavy investment, and Alphabet’s recent equity raise signals that AI capex overall will likely remain high for some time. Our view is that continued AI adoption and economic growth, alongside a healthy US consumer, should drive 20% earnings per share growth for the S&P 500 this year, supporting additional market gains over the medium term.

Continued efforts to reopen the Strait should allow investors to focus on fundamentals. Uncertainty over when energy flows through the Strait of Hormuz will resume continues to be a key source of market volatility. The US-Iran peace talks remain in limbo, with Hezbollah rejecting a US-brokered ceasefire in Lebanon and Israel saying it would not withdraw troops from the country. But efforts by the White House to reach a peace deal with Tehran continue, especially amid growing pressure from Congress to end the war. While recent developments underlined our view that the road to a lasting solution will be bumpy, our base case remains that an eventual US-Iran deal should allow markets to focus fully on the resilient economic backdrop and strong earnings growth.

So, we retain a positive outlook on US equities and recommend investors hold a diversified exposure to navigate the current environment and reduce concentration risks. We favor consumer discretionary, financials, health care, industrials, and utilities on a tactical basis, and see long-term growth opportunities in AI, Power and resources, and Longevity.