From the studio

Video: Investors Club | Ceasefire implications, plus the alternatives playbook (7 mins)

Thought of the day

Global equities rose for an eighth consecutive trading day on Tuesday, the longest rising streak since September, as optimism over further talks between the US and Iran pushed oil prices lower. The S&P 500 advanced 1.2%, putting the benchmark just 0.2% below its all-time high in late January. Brent crude oil was trading around USD 95/bbl at the time of writing.

We have recommended investors to position for medium-term equity gains since the start of the conflict, and we continue to see healthy potential for a rally for the remainder of this year from the current S&P 500 levels amid solid profit growth and a supportive macroeconomic backdrop. But we also expect developments in the Middle East and energy prices to remain a key driver for near-term equity market performance.

Energy flows from the Strait of Hormuz remain disrupted, and the outcome of further peace talks is unclear. With Washington and Tehran looking to arrange a second round of peace talks in the coming days and Israel and Lebanon having held their first high-level meeting in more than 30 years, investors are likely hoping they can turn the page on the conflict. Still, the US naval blockade of the Strait of Hormuz remains in effect. Shipping data showed that a US-sanctioned tanker made its way back to the Strait after exiting the Gulf the day before, failing to break through the blockade. Whether the upcoming negotiations will lead to meaningful de-escalation is also unclear. Given any normalization of traffic through the Strait will take time, energy prices are unlikely to fall back to pre-conflict levels in the near term, and the economic costs of high oil prices remain to be seen. These uncertainties mean investors should be prepared for continued bouts of market volatility.

The US economy should provide a supportive backdrop. What is encouraging is that the US economy is holding up well so far. Despite a spike in headline inflation due to higher oil prices, data showed that underlying inflation pressure in March was milder than expected, and consumer spending remains healthy. US factory activity is also improving, with the ISM manufacturing index recovering back into expansionary territory after being in contraction for the last three years. Additionally, energy spending accounts for only a small share of household budgets, and recent comments from consumer-oriented companies all suggest largely stable demand trends despite higher oil prices. We expect the US economy to stay resilient, supporting corporate activity.

Healthy profit growth is likely to underpin further stock gains. We expect S&P 500 corporate profits to increase about 17% for the first quarter of this year, marking the fastest pace of growth since the fourth quarter of 2021, driven by a combination of broad-based strength and robust demand for semiconductors from the AI buildout. In addition to select tech companies, we see above-average growth from sectors including financials and materials. On forward guidance, we think there is a good chance that forecasts will be better than feared. So far, there is scant evidence of negative impact from the conflict in earnings revisions, and the bottom-up next 12-month S&P 500 earnings per share estimate continues to march higher.

So, we maintain our Attractive view on US equities, favoring consumer discretionary, financials, health care, industrials, and utilities in the current environment. Investors should also ensure portfolio diversification amid an uncertain geopolitical backdrop by making sufficient allocations to quality bonds, gold and broad commodities, and alternatives such as hedge funds.