From the studio

Video: CIO Monthly | Mark Haefele on earnings, oil, and yields (3 mins)
Video: Investors Club | CIO's new targets on the S&P 500 and oil (6 mins)
Video:Delwin Limas on NVIDIA earnings and CIO's latest tech positioning (3 min)
Video: Deep Dive | Fed policy outlook and fixed income opportunities (8 mins)

Thought of the day

Oil prices rose on Tuesday as fresh US strikes on Iran complicated optimism that the two sides were nearing a deal to end the three-month-long war. Brent crude oil was trading 3.3% higher at USD 99.3/bbl at the time of writing, while S&P 500 futures pared earlier gains.

US Central Command said it had carried out fresh strikes against targets including boats attempting to lay mines and missile launch sites, in what it described as defensive actions. This came just hours after US President Donald Trump said that negotiations with Iran were “proceeding nicely.” Israeli Prime Minister Benjamin Netanyahu on Monday also said his country would intensify its strikes against Hezbollah in Lebanon.

The evolving situation in the Middle East and elevated bond yields are putting the global stock rally to the test, and bouts of market volatility are likely as investors react to fresh headlines.

But we also think strong earnings should support further gains for equities over the medium term, and we see attractive opportunities across regions.

A broadening of profit growth should support US equities. First-quarter earnings results have been robust, with underlying earnings (19%) growing by the fastest pace in four years. About 80% of companies have beaten sales and earnings per share (EPS) estimates, above historical averages, while the median EPS beat is better than the longer-term average since 2015. This, in our view, suggests a broadening of profit growth. We now expect S&P 500 EPS to grow 20% year over year this year, supported by continued economic growth and AI adoption. At the same time, it is not yet clear how the gains from AI might ultimately be spread across the economy, and there are likely to be periods ahead when realized profit growth is weaker. We therefore advocate holding a diversified exposure to include the whole AI value chain, industrials, automation, and space.

Multiple catalysts are likely to drive Asian stocks higher. South Korea and Taiwan have led Asia’s outperformance against global equities so far this year, and we still see room for further growth in the regional AI hardware supply chain. But with risk-reward now more balanced following the strong rally, we think the next leg of growth could broaden to the rest of Asia. We see opportunities in mainland China, as improving AI monetization should help narrow the valuation gap between its tech leaders and their global peers. The country’s manufacturing base is also benefiting from the global AI capex cycle, with robust international demand for Chinese power equipment and energy storage. Separately, the value-up movement has advanced in markets like Singapore, while resilient earnings and cash flow should continue to offer strong dividend yields across Southeast Asian markets. We expect MSCI Asia ex-Japan profits to rise by 62% this year, and we see a broadening of market leadership in Japanese equities on the back of a manufacturing upturn and policy support.

Europe offers both defensive and cyclical opportunities. While we hold an overall Neutral stance on Eurozone equities, the earnings backdrop is favorable and the structural growth drivers remain firm. First-quarter results highlighted solid demand across key secular themes, notably AI investment and electrification, while also pointing to early signs of automation equipment demand picking up. Additionally, the breadth of companies beating earnings expectations has exceeded that of revenue beats for a fifth consecutive quarter, leaving many companies well placed to deliver meaningful operating leverage if sales volumes recover later this year, as we expect. We recommend a selective approach to investing in the region, favoring defensive areas like Swiss equities and health care, and in cyclical segments like consumer discretionary, where valuations are attractive and earnings are poised to improve. We also like cyclicals that overlap with secular drivers, such as IT, industrials, and German equities.

So, we expect equity markets to move higher over the medium term, and recommend a diversified allocation. Investors can also use megacap rallies to rebalance into structured investments and multifactor strategies for better downside protection.