From the studio

Podcast: How frontier AI regulations could impact the tech trade, on Apple and Spotify (5 min)
Podcast: Jump Start | US-Iran deal, Fed meeting, and tech volatility (6 mins)
Podcast: Across the Pond | Europe's overlooked innovators, on Apple and Spotify (17 mins)
Video:Investors Club | Your questions answered on gold, the Fed, and semis (9 mins)

Thought of the day

What happened?
The US and Iran on Sunday said they had agreed on a framework to end the war, halt the US blockade of Iran, and reopen the Strait of Hormuz. US President Donald Trump stated that the deal “is now complete,” while Iran’s Supreme National Security Council said in a statement that the war will end “permanently and immediately on all fronts, including in Lebanon.” Pakistan and Qatar, the lead mediators, confirmed the deal.

A memorandum of understanding is scheduled to be signed on Friday in Switzerland. Iranian state-affiliated media reports suggest that the agreement includes a commitment to reopen the Strait of Hormuz within 30 days after mine clearing, a phased lifting of US sanctions on Iranian oil exports, and the unfreezing of some of the Islamic Republic’s overseas assets. The deal also sets out a 60-day negotiation window on a broader accord, including constraints around Iran’s nuclear programs.

Markets reacted quickly and positively. Brent crude oil fell 4.9% to USD 83 a barrel at the time of writing, the lowest level since early March. The US dollar weakened, gold rose to near USD 4,350/oz, and the 10-year US Treasury yield fell around 5 basis points as investors pared back their expectations for a Federal Reserve rate hike. Asian and European equities rose across the board, and S&P 500 futures were 1.3% higher ahead of the US market open on Monday.

Separately, a leading frontier AI model was abruptly shut down late Friday following a new US policy directive immediately restricting access for foreign nationals. Reuters reported that the move followed warnings from several tech leaders to the administration about loopholes that could bypass the model’s safeguards. The provider withdrew the model after determining it could not reliably limit access by nationality in line with the order.

What do we think?
Our base case has been for a diplomatic resolution to the Iran conflict, and markets clearly welcome the latest development, although how quickly traffic through the Strait can normalize remains to be seen. Given worries about sea mines in the waterway, markets will look for clearer evidence that shipping companies and insurers have sufficient confidence to traverse the Strait.

Whether and for how long the deal can last is another question. The prior ceasefire didn’t lead to a complete halt to hostilities, and periodic flare-ups in tensions could still lead to bouts of renewed market volatility.

The White House has also yet to release the specific terms of the deal, and the gap between now and Friday raises the possibility that some details may have yet to be ironed out.

Additionally, long-standing issues such as Iran’s nuclear and ballistic missile programs remain unresolved, while conflicts between Israel and Hezbollah have added another layer of complexity to the situation. Just hours before the announcement of the deal, Israel launched an air strike on southern Beirut in a move it claimed to be a response to Hezbollah’s drone attacks on northern Israel.

However, if the deal is sustained, it should allow investors to focus more fully on the macroeconomic backdrop of resilient economic growth, strong earnings, and AI investment, which we think should continue to drive global stocks higher.

In the US, most second-quarter GDP growth tracking estimates are in the 2.5-3% range, supported by fiscal stimulus and fading tariff effects. While growth is likely to moderate in the second half of the year, this, together with lower oil prices based on the US-Iran deal, should contribute to a deceleration in headline inflation, and allow the Federal Reserve to resume easing next year, in our view.

We also maintain the view that the secular trend of AI will continue to support equity performance amid durable compute demand and growing spending. While tighter US restrictions could reduce incentives for frontier labs to invest in training ever more capable models, we think any hit to sentiment would likely be limited unless restrictions broaden materially or last longer than markets currently expect. Multiple reports suggest senior lab staff will meet White House officials this week in a bid to address the security concerns and reverse the ban. We also note that unilateral regulatory AI restrictions tend to be difficult to sustain, especially if they weaken relative competitiveness and slow domestic innovation.

What should investors do?
Given the current backdrop, we maintain our view that investors should stay positioned for long-term stock gains while managing risks with a diversified portfolio.

For equities, we see the case for diversified exposure across sectors and geographies. While we maintain our conviction in further market upside, we also see higher dispersion between individual stocks as calling for more diversified core exposure, alongside targeted exposure to structural growth opportunities.

At a regional and sector level, in the US, we favor health care, financials, industrials, utilities, and consumer discretionary. Elsewhere, we see upside risk to our 62% earnings growth forecast for the MSCI Asia ex-Japan this year and expect Europe’s corporate profits to grow around 25% over two years.

In fixed income, while markets have pared their expectations for central bank rate hikes following the latest deal, we still think current pricing overestimates the potential extent of hikes. We maintain the view that short- to medium-maturity quality bonds offer an appealing risk-return profile, given the robust portfolio income they offer and the crucial role they play in stabilizing portfolios. We continue to see fiscal risks at the long end of the curve.

On gold, we recently lowered our price forecasts to reflect the expected delay of Fed rate cuts until 2027, though we think that prices can still rise over the next 12 months amid long-term debt and inflation concerns, and ongoing geopolitical uncertainty.