From the studio

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Thought of the day

US Treasury yields rose and the US dollar strengthened on Wednesday after some Federal Reserve policymakers showed willingness to hike interest rates during the Federal Open Market Committee (FOMC) meeting at the end of last month. The 10-year yield stood at 4.1% at the time of writing, and the DXY dollar index rose to the highest level in almost two weeks.

Minutes from the 27-28 January meeting, released Wednesday, showed that “several” participants were open to upward adjustments to interest rates if inflation remains at above-target levels. While the minutes did not suggest officials were contemplating the possibility of rate increases, they made clear policymakers were in no rush to cut rates as “the vast majority of participants judged that downside risks to employment had moderated in recent months while the risk of more persistent inflation remained.”

This is consistent with our view that the Fed is likely to keep rates on hold in the near term. However, we also believe that the US central bank has further to go in its easing cycle, and this remains a key pillar in our positive outlook on US equities overall, despite our recent downgrade of the broader tech sector to Neutral. In fact, we see attractive stock opportunities across regions.

The broad US equity bull market is underpinned by supportive monetary policy and resilient economic growth. It’s worth noting that the FOMC meeting preceded the publication of January’s consumer price index (CPI), which showed that underlying inflation on a year-over-year basis rose at the slowest pace since early 2021, with shelter inflation remaining contained. Our view is that price pressures are likely to moderate more clearly in the coming months, allowing the Fed to cut rates twice by the end of September. The FOMC minutes also noted that several participants expected higher productivity growth associated with AI or regulatory developments to put downward pressure on overall inflation. With the easing cycle still intact, and the US economy showing resilience amid an improvement in manufacturing activity and industrial output, we expect healthy and broadening profit growth across sectors. We see Attractive opportunities across financials, health care, utilities, consumer discretionary, and industrials.

Europe’s solid equity performance should continue against an improving outlook. European stock markets hit new highs this week following advances in defense and banking shares, widening the STOXX 600’s outperformance over the S&P 500 index. We anticipate further gains supported by an improving cyclical outlook, a more favorable structural backdrop, and reasonable valuations. With consensus expectations looking for earnings growth of 7% this year and 18% in 2027, we see appealing returns from the region. We like European industrials, IT, and utilities sectors as beneficiaries of global secular changes, and we expect banks and Germany to gain from the improving cyclical outlook and German fiscal stimulus. Those looking to position for the region’s structural shifts can also consider our “European Leaders” theme.

Japan and China also offer compelling opportunities for diversification. Sanae Takaichi was formally reappointed as Japan’s prime minister this week after her decisive electoral win earlier this month. We believe Japanese equities remain well positioned to benefit from a supportive policy environment, despite strong gains year-to-date. Historically, strong political mandates in Japan have attracted global capital, and the current environment is no exception. With a recovery in the global manufacturing cycle and corporate governance reforms scheduled for this year, we expect double-digit earnings growth for the coming financial year. Meanwhile, China continues to offer both growth and yield opportunities amid Beijing’s policy support, and the recent market consolidation means valuations are appealing. We like quality tech, health care, brokers, materials, power equipment, high-yield financials, and select consumer stocks.

So, we think investors with above-benchmark exposure to US IT and communication services should consider diversifying toward other areas of the market, as well as opportunities in global markets.