From the studio

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Thought of the day

Risk sentiment remains fragile as markets grapple with accelerating inflation, tech sector weakness, and fresh hostilities in the Middle East. The S&P 500 is now 4.5% below its all-time-high from earlier this month, while the 10-year US Treasury yield remains elevated at 4.54%.

The US has renewed “self-defense” strikes on Iran, citing “unwarranted and continued aggression,” as President Donald Trump vowed more attacks if no peace deal is secured. Iran said it has also launched counterattacks. Meanwhile, the headline US consumer price index for May rose to the highest level in three years, with core inflation accelerating to the fastest pace since September last year. Separately, Oracle said it plans to raise USD 40bn over the next 12 months to help fund its data center build-out, intensifying investor concerns over elevated AI spending.

We address these concerns and explain why we think the stock market has room to move higher.

Federal Reserve hikes remain unlikely in the near term. The US CPI report for May shows, in our view, that the balance of upside inflation risks in the US is evolving rather than dissipating. Tariff-related pressures are improving, but energy/geopolitical developments and AI-related demand dynamics remain active sources of upward pressure. Given the recent stability in the unemployment rate, Federal Reserve policymakers are likely to adopt a more hawkish tone in their communications in the near term. We think the US central bank is likely to remove the easing bias from its policy statement at next week's meeting, and shift the 2026 dot plot toward a no-cut median projection. But unlike current market pricing, we still think the probability of near-term rate hikes is low. In our view, a re-acceleration in the US's GDP growth above 2.5%, a steady decline in the unemployment rate, or a sustained increased in inflation expectations would be required for the Fed to raise rates. With none of these conditions likely to be met in the near term, we expect the Fed to resume easing from March 2027 as economic growth slows in the second half of this year.

Solid AI fundamentals should drive tech earnings growth. Oracle's shares fell over 10% in extended trading on Wednesday after the company reported higher-than-expected capital expenditures and plans to raise USD 40bn through a combination of debt and equity financing. This follows Alphabet’s USD 85bn equity raise last week and Meta’s potential stock sale, rekindling investor worries about AI profitability. Without taking any single-company views, we believe the level of capex versus a company’s cash flows is worth monitoring, but we also think the extension of the AI capex cycle as a whole continues to underscore the sustained and growing demand for AI compute. This week, Taiwan Semiconductor Manufacturing Co reported a 30% rise in sales for May, while major cloud platforms announced advance orders for compute resources totaling USD 2tr. With the recent retreat in tech shares likely reflecting a consolidation in investor positioning, we believe the depth and durability of AI demand should continue to support higher tech earnings.

Continued efforts to reopen the Strait of Hormuz should allow investors to focus on fundamentals. The flare-up in Middle East tensions underlines our view that the road to a lasting solution will be bumpy, but our base case remains that diplomacy will ultimately prevail. There is growing pressure for US President Donald Trump to end the Iran war ahead of the US midterm elections, and Iran is eager to rebuild infrastructure. An eventual US-Iran deal should allow markets to focus fully on the resilient economic backdrop and robust earnings growth across sectors beyond tech.

So, we maintain our positive outlook on US equities and believe investors should stay positioned for longer-term gains. We also believe the current environment reinforces the importance of diversification and risk management as markets navigate elevated volatility. Robust earnings growth across sectors and geographies warrant a diversified equity exposure, while the current elevated level of yields offers an attractive entry point to lock in portfolio income through short- and medium-maturity quality bonds. Investors can also consider hedges such as capital preservation strategies to reduce the risk of large drawdowns while maintaining participation in potential rebounds.