From the studio

Video: Investors Club | What Trump-Xi meeting means for Chinese equities and the CNY (9 mins)
Video: Market Playbook | James Cheo on the AUD’s transition into a strategic currency (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)

Thought of the day

The S&P 500 topped 7,500 for the first time on Thursday, on track to post a seventh consecutive week of gains. Supported by AI optimism, strong corporate profits, and a still-robust economy, the latest rally may mark the equity benchmark’s longest winning streak since December 2023.

We continue to hold a positive outlook on US equities, and believe that secular trends such as AI, electrification, and longevity will underpin the market’s long-term growth.

But given the pace of the recent rally (over 18% in seven weeks), some consolidation would not come as a surprise, especially as geopolitical uncertainty in the Middle East persists and the Strait of Hormuz is still largely blocked. Brent crude oil has stayed above USD 100/bbl for more than three weeks.

Higher energy prices have also fed into inflation data, with both consumer and producer prices for April coming in stronger than expected. This, plus a robust retail sales print for April, has led futures markets to price in a full Federal Reserve interest rate hike by this time next year.

Our view remains that the bar for a Fed hike is high, particularly as new chair Kevin Warsh seems inclined to look through tariff or oil-induced one-off supply shock inflation. We think sequential core goods inflation should moderate in the months ahead, with slowing wage and economic growth allowing the US central bank to resume easing toward the end of this year.

Against this backdrop, we think investors with concentrated positions should consider rebalancing their portfolios from a position of strength.

Diversify equity positions across sectors and geographies. Concentrated equity exposure can look efficient in a market rally, but become much more fragile when narratives shift, leadership rotates, or crowded positions come under pressure. The degree of single-stock and sector volatility relative to index-level volatility has also been notable in recent months. While we hold a positive outlook for US equities, we expect future gains to come from a broader set of sectors, beyond the megacaps. We also see attractive opportunities in markets like Japan, China, Switzerland, and European health care, IT, industrials, and consumer discretionary.

Consider bonds, alternatives, and commodities to enhance portfolio resilience. Portfolio allocation to fixed income can help smooth returns and limit losses. According to the Global Investment Returns Yearbook, a 60:40 equity-bond portfolio has never declined more than 50% peak to trough since 1900, even though stocks and bonds have separately on several occasions lost more than 70% in real terms. Our view is that markets are currently overpricing the risk that central banks will hike interest rates, and this creates an opportunity for investors to add to short- and medium-maturity quality bonds for durable income. Allocations to alternatives, gold, and broad commodities can also provide less-correlated return streams. Historical data compiled by the Yearbook shows that gold and commodities stand out as a hedge against inflation.

Time in the market ultimately beats timing the market. While record highs may create some angst among investors about entering the market now, it is important to remember that there is no material difference between forward returns when the market is at or below a record high. There is also no relationship between valuations and returns over shorter-term time horizons. What matters more over the next 12 months is the outlook for corporate profits, which we continue to believe will be healthy.

So, we recommend investors stay invested, and maintain the view that holding a well-diversified portfolio is the most effective way to navigate near-term uncertainty while capturing long-term gains.