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Thought of the day

US equities gained ground on Tuesday after softer-than-expected consumer prices offered some relief to investors worried about inflation and tighter central bank policy. US President Donald Trump also backed away from his plan to impose a 20% fee on cargo shipments through the Strait of Hormuz, saying it would be replaced by trade and investment agreements with Gulf states. The S&P 500 rose 0.4%, while the 10-year Treasury yield fell 3 basis points to 4.58%

Still, US strikes on Iran continued, and the naval blockade of all Iranian shipping to and from its ports and coastal areas resumed as planned. Trump also threatened to hit power plants and bridges next week unless Iran returns to the negotiation table.

With neither Washington nor Tehran willing to make concessions over control of the Strait of Hormuz at this time, the risk for further hostilities in the coming days and weeks remains high. But we also believe that both sides will seek to avoid a return to all-out war, as the incentives that led to the signing of the memorandum of understanding last month remain intact. A prolonged closure of the waterway would be a drag on the US economy, and the naval blockade of Iran deprives its regime of a key source of income and impedes the provision of vital goods to its population.

For equities, this means that while geopolitical dynamics may trigger setbacks, earnings should remain the key driver of performance for the remainder of the year.

In fact, with major US banks kicking off the second-quarter earnings season with solid beats, we expect another strong set of results in the coming weeks. We forecast S&P 500 earnings growth to accelerate to around 28% for the three-month period, and all 11 sectors of the market look poised to report an increase in profits.

AI infrastructure investment remains strong. Not surprisingly, semiconductor companies are likely to account for a substantial portion of the earnings growth in the second quarter. We estimate that overall AI-related capex will rise by 68% this year to around USD 820bn, followed by a further 21% increase next year to near USD 1tr. We do not expect another round of guidance increases this quarter after the aggressive upgrades last quarter, and acknowledge the rising risk of disappointing capex growth beyond 2027. But we also believe capex cuts in the near term are unlikely. Rental prices for AI semiconductors have risen over the past quarter, constraints remain in the semiconductor supply chain, and companies are raising large sums of capital in recent months to bolster AI spending.

Business conditions in cyclical sectors are improving. Beyond semiconductors, other segments of the market should also see an acceleration in earnings, and we expect the median S&P 500 company to report solid growth of around 12%. This is supported by a pickup in industrial activity, with the ISM Manufacturing index remaining in expansionary territory for six consecutive months. In fact, we believe the improvement in manufacturing is still in its early stages. Our analysis shows that when the ISM Manufacturing index's new orders component moves into expansion for six months in a row, as it did in June, it tends to stay in expansion for the next 18 months. This suggests we should hear upbeat commentary from US manufacturers.

Consumer spending remains solid. While US consumer spending has seen a bifurcated trend, with stronger momentum among higher-income households, aggregate spending remains supported by a resilient labor market. The unemployment rate is relatively low, and new claims for unemployment insurance are near their lowest in decades. ISM data also showed that manufacturing employment is improving, as US manufacturers have started to add jobs this year following cuts between 2023 and 2025.

So, we believe strong earnings growth across sectors should continue to drive US equities higher over the next six to 12 months, and we expect the S&P 500 to reach 8,200 by June next year. Investors should ensure diversified exposure as market leadership broadens, and consider capital preservation strategies to manage risks.