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Thought of the day

Investor sentiment remains fragile after a tech-led sell-off shook markets on Tuesday, when the Philadelphia Semiconductor Index fell nearly 8%, the Nasdaq slid 2.2%, and the S&P 500 ended the day 1.4% lower. Korea’s Kospi swung between losses and gains on Wednesday following its 10% drop a day earlier amid pressure across chip stocks.

Ongoing concerns over tighter monetary policy from the Federal Reserve and questions around the sustainability of the AI trade have dampened risk appetite, with investors looking to Micron’s earnings later today to gauge the health of the memory segment. Shares of chipmaker Cerebras fell around 10% in late trading on Tuesday after it gave an annual sales forecast that disappointed investors.

Without taking any single-company view, we think the latest market correction should be considered in the context of the strong rally this year. Both the Kospi and the Philadelphia Semiconductor index remain around 90% higher than at the start of the year, while the Nasdaq has risen 23% since the end of March, when there were first signs that the US and Iran were open to ending their conflict.

With traffic through the Strait of Hormuz now picking up and geopolitical risks subsiding, we believe the resilient macroeconomic backdrop and robust fundamentals should continue to support corporate earnings growth and markets more broadly. In fact, while we remain confident in the AI growth story, we also expect that the next phase of stock gains will come from a broader range of opportunities.

Continued growth in AI capex should underpin further gains in the AI-led part of the market. First-quarter results confirmed that hyperscalers remain committed to their heavy capital expenditure plans. We expect overall AI-related capex to rise by 68% year over year in 2026 to around USD 820 billion, followed by a further 21% increase in 2027 to roughly USD 990 billion, with upside risks to these estimates. These are substantial growth rates, but they are occurring in an environment where demand for AI tokens continues to outpace supply. Cloud growth at the major platforms accelerated to 40% year over year in the first quarter, with reported advance orders for compute resources totaling USD 2 trillion. We therefore believe the rally in AI-linked stocks can continue to support the overall market.

The rest of the market also has the potential to contribute to returns. A resilient US economy, solid labor market, and strong credit creation could all help support earnings outside the AI complex, enabling the rally to broaden further. A supportive consumer backdrop should help underpin consumer discretionary stocks, the recent pickup in the ISM Manufacturing index points to improving conditions for industrials and other cyclical parts of the market, and the relative resilience of the health care sector points to a role that is larger than just a defensive investment. We expect S&P 500 earnings per share to grow 20% this year and 12% in 2027.

Both Asia and Europe offer appealing opportunities. We also expect the rally to continue beyond the US market and see compelling opportunities globally. Asia offers an attractive combination of strong earnings growth, AI leaders, and undemanding valuations, and we expect MSCI Asia ex-Japan earnings to rise 72% this year. While we continue to see opportunities in the region’s AI hardware supply chain, we also see underlying strength beyond technology and scope for gains to broaden as energy flows normalize. We also like Japan’s equity market, which offers diversified exposure to the global AI supply chain, a cyclical recovery, and ongoing corporate reforms. In Europe, we see opportunities in industrials, health care, and consumer discretionary, and favor companies with resilient earnings, exposure to global demand, and structural growth drivers.

So, we remain constructive and believe investors should stay invested, while keeping diversification at the center of portfolio construction. The past few months have shown how quickly narratives can shift, how costly excess cash can become when markets move higher, and how single-stock selection represents both an opportunity and a risk.