Constructive fundamentals support further US equity upside

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Investor sentiment improved toward the end of the week after hyperscalers reported accelerating cloud growth and signaled further increases in AI spending. The Philadelphia Semiconductor Index rallied 8.2% on Thursday, its biggest single-day gain in over 15 months, while the S&P 500 rose 1.7%.

Amazon posted its fifth straight quarter of cloud revenue acceleration, following Microsoft’s fastest cloud growth in four years. Citadel’s purchase of a large portion of AI-related stocks held on leverage by hedge fund Situational Awareness also supported sentiment. A forced liquidation of the fund’s large holdings into the market due to margin calls could have triggered a disorderly sell-off.

Additional unwinding of leveraged positions under pressure may trigger further volatility, but we maintain the view that solid fundamentals should continue to support the market.

The AI investment cycle remains intact in the near term. With hyperscalers raising their 2026 capital expenditure estimates and projecting further increases in 2027, we now expect overall AI spending to hit USD 900bn this year and USD 1.2tr in 2027. This reinforces our constructive view on semiconductor and hardware demand, although we reiterate the importance of selectivity within the sector, and higher near-term capex raises the hurdle for sustained spending into 2028. Meanwhile, accelerating cloud growth and expanding opportunities to monetize AI investment should sustain big tech companies’ earnings growth.

Steady Fed policy should keep markets supported. The Federal Reserve kept interest rates steady this week, with Chair Kevin Warsh suggesting a period of “watchful thinking” instead of any urgency to hike. Data released on Thursday showed that the core personal consumption expenditure (PCE) price index for June rose by a modest 0.1% from May, the smallest monthly increase since March 2025. While the annual measure remains well above the Fed’s 2% target, June’s 3.3% increase also marked the first slowdown in five months. We expect further goods disinflation amid fading tariff effects to set up more disinflation in core PCE in the coming months, keeping the Fed from embarking on an aggressive hiking cycle.

Resilient US economy underpins broadening rally. Data this week also showed that the US economy expanded at an annualized rate of 1.5% during the second quarter, down from the first quarter’s 2.1% and below market expectations. Net trade exerted a 1-percentage-point drag due to a slowdown in export growth. But consumer spending remained strong, with the drawdown of inventories reflecting robust consumption, and business investment (especially in AI) was also a key driver of growth. While fading fiscal support could lead to softer growth conditions in the second half of the year, we expect a still-resilient macroeconomic backdrop to support earnings per share growth of 20% this year for the S&P 500.

So, we think there is room for US equities to move higher, and investors should hold broadly diversified exposure to capture a wider set of opportunities and growth drivers. We like financials, health care, consumer discretionary, industrials, and utilities.