From the studio

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Thought of the day

Global equities are on track to post their first weekly loss in three weeks as the selloff in chip stocks deepens and tensions between the US and Iran escalate further. The MSCI All Country World index has so far fallen 0.4%, while the Philadelphia Semiconductor index has slid 8.5%.

The latest setback reflects several risks weighing on investor sentiment, including renewed fears of central bank rate hikes if energy prices rise further or inflation proves sticky, and potential disappointment in AI capex growth or monetization trends.

But we think strong earnings growth, both within and beyond the US, should continue to support global equities, and we see around 10% upside for the MSCI All Country World index over the next 12 months.

AI infrastructure investment remains a key driver. Given the strong investment in AI infrastructure, we expect semiconductor stocks to account for more than 40% of the S&P 500 earnings growth in the second quarter. Demand for compute continues to exceed available supply, while capacity constraints along the supply chain are unlikely to ease quickly. We forecast earnings growth of 92% this year for the Philadelphia Semiconductor index, and another 40% in 2027. These forecasts underline why we remain constructive on semiconductors overall, and why the industry should continue to support the broader equity rally. But as the AI growth story evolves, a clear risk to the rally is if AI capex or monetization disappoints. With limited capex visibility beyond 2027 at this stage, we think investors should ensure their AI positions are broadly diversified, including exposure to more defensive areas such as payment networks, data center REITs, and select smartphone makers.

The earnings story is broader than semiconductors and AI. While semis are super-charging the headline growth numbers, we expect all 11 sectors of the market to report an increase in profits in the second quarter: We forecast 12% earnings growth for the median S&P 500 company. Notably, the ISM Manufacturing PMI has been in expansion territory (above 50) for the past six months, and retail sales and the labor market remain solid. That points to an economy still expanding but steady enough to avoid a more hawkish Federal Reserve response, in our view. We see opportunities in consumer discretionary, financials, health care, industrials, and utilities.

Broad-based earnings growth in Europe and Asia should also support the rally. We recently upgraded Eurozone equities to Attractive, as we believe the cyclical backdrop is improving and the region’s earnings recovery is becoming more visi­ble. Manufacturing activity appears to have troughed, cost discipline is improving, and fears of a prolonged inflation shock appear to be easing. We forecast earnings growth of 8% this year and 15% in 2027 for the region. In Asia, the AI hardware supply chain should continue to be a key driver, while opportunities are also emerging in oil- and rate-sensitive sectors such as airlines, industrials, real estate, and financials. We have upgraded India to Attractive, and continue to like Japan, China, and select Southeast Asian markets. Overall, we expect profits to rise 72% this year for MSCI Asia ex-Japan, and 20% next year.

So, we see room for global stocks to move higher, with Europe, Asia (including Japan), and emerging markets all offering inves­tors ways to participate in market upside. The wide gaps between individual stock performance, however, mean that concentration risks are elevated, and this reinforces the case for a diversified core portfolio. In addition to a diversified equity allocation, investors should hold sufficient exposure to quality bonds, commodities, and alternatives. We also favor enhancing portfolio income through diversified fixed income strategies, including exposure to emerging market and high yield credit.