From the studio

Podcast: Across the Pond | Europe's overlooked innovators, on Apple and Spotify (17 mins)
Video:Investors Club | Can the equity rally continue? (8 mins)

Thought of the day

What happened?
A rebound in equities ran out of momentum on Tuesday, as selling of tech stocks resumed and optimism over an imminent US-Iran deal faded. The US and Iran later exchanged strikes after President Donald Trump retaliated against Tehran for shooting down an American helicopter.

The S&P 500 fell 0.3%, erasing Monday’s 0.3% rebound from a 2.6% decline on Friday. As with the end of last week, the tech sector led the decline. The Philadelphia Semiconductor Index, which tracks the largest firms in the industry worldwide, was down 1.9%, continuing a recent bout of elevated volatility—including a 5.6% rebound on Monday after a 10.3% fall on Friday.

While there was no clear catalyst for the latest equity pullback, several concerns from last week continue to weigh on investor sentiment. Equity issuance is set to pick up, after mixed news from the tech sector last week, including disappointing AI guidance from chipmaker Broadcom. Investors are on edge ahead of the release of the US consumer price index for May today, which is expected to show annual inflation climbing above 4%. That could further stoke worries over tighter policy from the Federal Reserve. Following stronger US jobs data last week, markets are now fully priced for a 25-basis-point hike by the end of 2026.

The potential for a US-Iran agreement to reopen shipping remained elusive. While the US Central Command said it has now completed the "self-defense strikes," the latest episode highlights the fragility of the ceasefire agreed in April. Iran's Foreign Minister, Abbas Araghchi, said in a social media post that his country "will leave no attack or threat unanswered," and the Islamic Revolutionary Guard Corps reportedly launched missiles on four American targets. Iran also said it fired drones at the US’s military bases in Bahrain and Kuwait.

What do we think?
The tech sector is coming under pressure from a combination of higher rate expectations, which lowers the current value of more distant profits, and anxiety over elevated valuations and uncertainties over the monetization of AI. Investors positioning in parts of the sector may have also become extended after a strong rally, and the Philadelphia Semiconductor Index is still up 78% YTD even after the recent setback. But business fundamentals for the sector remain solid.

On the macro front, we expect May’s CPI data to represent the high-water mark for headline inflation. While data center demand has been spilling into consumer tech prices, our view is that the boost from higher tariffs is fading. With no evidence of accelerating wage pressures, second-round effects from higher energy prices should remain contained. As this becomes clearer later in the year, we expect a more dovish turn from Fed policymakers.

Developments in the Middle East remain a source of near-term volatility, particularly through the energy channel. While the path toward a resolution is likely to be uneven, our base case is that diplomacy ultimately prevails, allowing investors to refocus on resilient economic fundamentals and robust earnings growth in both the US and Europe.

How to invest?
We think the current environment reinforces the importance of diversification, income generation, and risk management as markets navigate elevated volatility driven by both macro and sector-specific factors.

Diversify across equities. Market performance has been driven primarily by a relatively small number of companies, increasing the risks to poorly diversified investors. We recommend broadening exposure, including to preferred markets such as Japan, emerging markets, China, global health care, Switzerland, and European consumer discretionary. We also favor diversifying across the AI value chain, including areas such as global industrials and power and resources.

Lock in yields. While higher energy prices have added to concerns about tighter policy, we think markets have gone too far in pricing rate hikes. The recent sell-off in bond markets therefore presents an opportunity to lock in yields by adding to quality bonds, particularly in the short- and medium-maturity segments. In Europe, selectivity remains important given policy tightening, while equity income and yield-generating strategies can support diversified income.

Hedge market risks. Recent volatility is a reminder that markets can move in both directions. While equities remain near all-time highs, risks persist, including ongoing tensions around the Strait of Hormuz, rising AI competition, and elevated fiscal deficits. Investors can consider using periods of relative calm to add hedges and reduce the risk of large drawdowns while maintaining participation in potential rebounds.