The case for buying into all-time equity highs amid elevated Iran tensions
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
US equity markets have staged a powerful recovery over the past several weeks, climbing a mounting wall of worry with surprising agility. After falling for five straight weeks into late March, the S&P 500 has now risen for five consecutive weeks. On Tuesday, both the Nasdaq and S&P 500 hit record closing highs, aided by solid earnings and news from AI-related stocks. Alongside strong earnings and resilient fundamentals, the weeks-long rally has been encouraged by de-escalation in the Strait of Hormuz, a Federal Reserve still retaining its easing bias, and reported institutional positioning shifts to cover shorts, unwind hedges, and rerisk.
Yet the geopolitical backdrop remains unsettled. Energy flows through the Strait of Hormuz are still disrupted, and the outlook for a durable resumption in shipping remains uncertain. President Trump’s “Project Freedom” plan to guide the movement of ships through the Strait was “paused” late Tuesday, amid military exchanges and attacks on ships, though the ceasefire itself appears to be holding. We continue to view the state of energy flows as a defining near-term macro factor, especially if the disruption lasts longer than markets now assume. Brent crude remains volatile, trading at elevated levels near USD 108 per barrel and implying a greater degree of stress than equities appear to reflect.
With US-Iran headlines challenging again this week, geopolitics could once again flare up and unsettle risk assets. But we think the more important story here is the strength of the earning engine that has underpinned the equity market rally:
AI spending, a key pillar, is looking stronger than ever. AI capex remains one of the clearest supports for growth, earnings, and market leadership, and recent tech earnings point to sustained demand, faster cloud growth, and higher sector capex. The four biggest AI spenders have now lifted their combined AI capex guidance to as much as USD 725bn this year, reflecting rapid data center expansion and persistent capacity bottlenecks. Importantly, supply tightness and price increases are now spreading beyond memory into CPUs, substrates, multilayer ceramic capacitors, back-end packaging, and other AI-related components. We continue to favor diversified exposure to memory, advanced semiconductors, and enabling infrastructure across sectors and geographies.
The rally’s foundation is wider than the headline AI winners. The AI theme is also spreading beyond technology, with utilities and power-related businesses benefiting from rising data center electricity demand. In that sense, AI is not only a tech story, but increasingly a broader investment and infrastructure cycle. We have been looking for around 17% S&P 500 earnings growth in the first quarter, the fastest pace in four years, and the reporting season so far suggests this estimate could be surpassed. A high share of US companies are beating both sales and earnings expectations, while guidance has generally been better than feared. Just as important, the strength is not limited to one narrow pocket of the market, with financials, industrials, and consumer-related businesses also showing resilience.
Record highs are no reason to panic. All-time highs for the S&P 500 and other markets can make investors nervous, especially when the path has been a rapid V-shaped recovery, as we have just experienced. Some of the recent move has been technical, driven by hedge unwinds and renewed risk-taking. Looking back through data to 1960, hitting a record high has not typically meant weaker forward returns for the S&P 500. On average, the S&P 500 returned 11.8% over the next 12 months and 22.8% over the next two years after an all-time high, versus 12% and 25%, respectively, when trading below a record high. We think what matters more is whether earnings expectations continue to rise and whether policy remains supportive.
So, while it is important to monitor risks, whether stemming from Iran or the recovery in valuations, we think a return to near-record highs is no reason to derisk in equities. We retain an Attractive view on US stocks and expect the S&P 500 to move higher by year-end, supported by healthy profit growth and a still-supportive monetary backdrop. Within US equities, we continue to favor consumer discretionary, financials, health care, industrials, and utilities, while staying constructive on AI-linked areas of the market.
We also think investors should consider opportunities beyond the US for diversification. With accelerating earnings momentum and still deeply discounted valuations versus global equities, we continue to see a strong case for Asia-Pacific markets, including China, Japan, South Korea, and Australia. We hold an overall Neutral stance on European equities, though we see pockets of opportunity that should help investors navigate an uncertain environment, including the European health care sector and the Swiss market, given their solid dividend yields and defensive characteristics. At the portfolio level, we continue to see value in quality bonds, gold, and broad commodities as diversifiers that can help investors stay in the market while managing uncertainty.