From the studio

Video: CIO’s Kiran Ganesh on why nostalgia isn’t an investment strategy (4 mins)

Thought of the day

The S&P 500 stood at a fresh record high on Tuesday despite weakness in select health insurers, with investors waiting for further cues from the Federal Reserve and megacap tech earnings.

The Fed is widely expected to hold the policy rate steady at 3.50-3.75% on Wednesday after three consecutive reductions last year, while tech earnings may offer insights on the demand for AI services, big tech’s capex plans, as well as adoption and monetization trends.

We maintain the view that US equities have room to rally more against a favorable macro backdrop, while tech and health care fundamentals continue to underpin our preferences on these sectors.

Fed policy should keep the macroeconomic environment supportive. Fed Chair Jerome Powell indicated a higher bar for future rate cuts at the central bank’s last policy meeting in December, saying current rates are now “within a range of plausible estimates of neutral.” But we believe further easing remains in store for the US central bank in the coming months, with additional evidence of US labor market weakness and contained inflation likely allowing the Fed to bring rates lower. Data going back to 1970 shows that the S&P 500’s average annualized return was 15% when the economy is not in recession and the Fed is cutting rates, which we define as a Fed rate cut within the last three months. We believe Fed policy should remain a tailwind for equities.

Health care remains one of our preferred areas despite near-term uncertainty over insurer profitability. Shares of multiple health insurers came under pressure this week after the Centers for Medicare and Medicaid Services proposed a smaller-than-expected increase in payments to private insurers next year for the Medicare Advantage plans they manage. The Medicare Advantage plan is a significant part of these insurers’ businesses, and the proposed rate would have a material impact on their profitability and overall earnings. We believe this will likely weigh on private insurers’ growth expectations and valuations in the near term, but we also note that the rate is not final until early April. In previous years, the final rate had generally been higher than the proposal. We think that this year’s preliminary rate may be part of a broader affordability discussion between the Trump administration and the health insurance industry, and we see potential for a compromise that could include industry concessions to address the affordability of health insurance in exchange for a higher final Medicare Advantage rate. More broadly, we maintain our positive outlook on the health care sector, favoring companies with exposure to large and growing markets such as obesity, and those related to the structural trend of our Longevity theme.

Evidence of AI monetization should strengthen investor confidence in the structural growth story. Given lingering valuation concerns, investors are heading into the tech earnings season seeking clarity on AI demand and monetization, as well as capital investment guidance. While higher capex is likely partially priced in, we expect cloud service provider revenue growth to accelerate during the quarter, and evidence that AI efforts are bearing fruit in terms of advertising engagement should also be viewed positively. We believe AI will remain a key driver for equity performance, and see beneficiaries broadening into the intelligence and application layers.

So, we expect US equities to stay supported and forecast the S&P 500 to reach 7,700 by year-end with broad-based gains. We see opportunities across the tech, health care, financials, utilities, and consumer discretionary sectors, and recommend investors with concentrated positions to diversify their exposure. This can include yield-generating structured strategies that generate income while waiting to buy assets at lower prices than today, and instruments that help investors to sell down concentrated positions at set prices in a systematic way.