Position for transformational innovation for long-term gains

Podcast: Ulrike Hoffmann-Burchardi's Signal over Noise, on Apple and Spotify (5 mins)
Podcast: Jump Start | US-Iran, recent rally drivers, and central bank policies (7 mins)
Video: Chief Economist: US-Iran, UAE's OPEC exit, US GDP, and FOMC (3 mins)
Video: CIO’s Delwin Limas on big tech earnings takeaways and the AI trade (4 mins)

Oil prices rose on Monday after the US and Iran rejected each other’s latest peace proposals to end the war, with Brent crude trading 3.5% higher to near USD 105/bbl at the time of writing. US President Donald Trump called Iran’s proposal “totally unacceptable,” after a re-escalation in hostilities last week.

Sentiment in the equity market was calmer, however, with the MSCI Asia ex-Japan index up 1% on Monday. The Stoxx Europe 600 opened flat, while contracts for the S&P 500 were little changed ahead of the US market open. The US equity benchmark stood at a fresh record on Friday.

Sustained AI demand and robust earnings growth have propelled global stocks higher over the past six weeks, but we think selectivity remains key in navigating the uncertain geopolitical backdrop and fast-moving AI landscape. We see our transformational innovation opportunities as an effective way to position for long-term gains.

Strong earnings across companies exposed to AI, Power and resources, and Longevity highlight long-term growth. Tech companies have delivered robust first-quarter earnings, with key participants reporting strong demand for AI compute, accelerating cloud growth, and higher capex. The Nasdaq is now on track to deliver 47% year-over-year earnings growth for the three-month period. Companies across our Power and resources theme have also posted solid results, with growing electricity demand and new investments underpinning their performance. Consensus estimates now imply 14% weighted average earnings growth for our Power and resources selection this year, and we see room for upside after the strong start in the first quarter. Additionally, results from key companies in the obesity market suggest that obesity treatments continue to represent a significant long-term growth opportunity within health care, supporting our Longevity investment theme.

Lower stock correlation underscores the importance of selectivity. While equity benchmarks have climbed steadily in recent weeks, the degree of fluctuation of single stocks has also increased. For example, the implied volatility of the average S&P 500 stock this month (a measure of how much investors expect stock prices to fluctuate) has been 2.4 times higher than the index volatility, above the typical average of about 2.0 times. Meanwhile, the average pairwise correlation of S&P 500 stocks over the last three months (a measure of how closely investors expect two stocks to move in tandem with one another) has dropped to its lowest level since 2018. This suggests individual stocks are following more distinctive, company-specific paths meaning that picking the right equities is becoming more important, and portfolio construction more impactful.

Innovation is likely to remain key in long-term growth. Recent history shows that each new transformational innovation has given rise to new leaders in the market. US Steel was the first company that reached USD 1bn in market capitalization as it transformed steel production. General Motors was the first company that reached USD 10bn because it embraced the automative revolution. IBM was first to reach USD 100bn by becoming a global leader in computing, while Apple raced to USD 1tr thanks to leadership in mobile computing. While these companies were propelled to success by transformational innovation, they also gave rise to whole new industries. In our view, we are now on the precipice of three new transformational opportunities—AI, electrification, and longevity.

So, we continue to recommend investors stay positioned in our transformational innovation themes, as we believe each of these secular trends should create multi-trillion-dollar market opportunities with new leaders over the next decade. Higher individual stock swings and lower co-movement may support more active and nimble strategies, including dynamic allocations to reflect fast-moving value chains, going beyond index investing, and use of opportunistic structured strategies that seek to exploit higher implied volatility for yield and to acquire stocks at lower levels. Investors in structured strategies should be able and willing to bear the unique risks of using derivatives.