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Thought of the day

Investors regained some confidence on Thursday after US banks reported strong fourth-quarter profits amid robust dealmaking activity, and the world’s biggest producer of advanced AI chips increased its capex plans and upgraded revenue forecasts for the coming years. Both the S&P 500 and the Nasdaq rose 0.3%, and their futures contracts are pointing higher ahead of the US open on Friday.

Without taking any single-company views, we maintain our conviction that the structural trend of AI will continue to power equity performance in the years ahead, and believe exposure to AI-related stocks is essential for long-term wealth preservation and appreciation.

But as in other innovation cycles in the past, we expect to see a performance handover from the enablers to the users of AI, and see room for catch-up from companies that leverage AI to improve business outcomes. Our top picks in this regard remain financials and health care, which are also supported by favorable fundamentals.

The financials sector should continue to benefit from improving profitability and increasing capital market activity. Bank stocks saw some volatility this week, with US President Donald Trump’s proposed one-year cap on credit card interest rates causing investor concerns. But there remain questions over the administration’s ability to implement such a cap, and we expect any impact to be temporary and manageable. Fundamentally, continued gains in capital market activity and an improvement in net interest margins amid normalized yield curves should drive further valuation upside, in our view.

Policy clarity and aging demographics support health care. The performance of the health care sector has improved significantly over the past several months amid policy clarity over Most Favored Nation (MFN) drug pricing. We expect incremental investor inflows into the sector, with obesity remaining a key theme. Nearly a billion people worldwide are living with obesity, and demand for effective, safe, and convenient obesity treatments should continue to support a robust runway for future expansion. Additionally, multiple late-stage clinical trial results expected in oncology, metabolic, and cardiovascular studies this year may boost investor optimism, while continued M&A activity supported by financial flexibility signal confidence and growth.

Evidence of AI monetization should drive investor confidence in tech companies. Ahead of earnings releases from US megacap tech companies, TSMC’s results this week suggest that AI investment spending is intact and that demand for compute remains strong. We believe the peak of the compute cycle is still several years away, with a rapid pace of innovation supporting further growth. We also believe the AI theme is broadening into the application and intelligence layers, with investors increasingly rewarding those able to generate profits from AI investment. With revenue growth at cloud service providers likely to accelerate further, we expect large tech companies to remain a key driver of S&P 500 profit growth.

So, we maintain our positive outlook on US equities, forecasting the S&P 500 to reach 7,700 by the end of the year. We recommend investors review their allocations and consider exposure to underinvested areas.