From the studio

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Thought of the day

Wall Street staged a comeback on Thursday after the peace deal between the US and Iran took effect and shipping started returning to the Strait of Hormuz. The S&P 500 rose 1.1% to above 7,500 again, the Nasdaq climbed 1.9%, while the Philadelphia Semiconductor Index rallied 6.4%.

While US President Donald Trump posted on social media that 鈥渙il is flowing,鈥 Vice President JD Vance pulled out of a planned trip to meet Iranian negotiators in Switzerland on Friday to begin complex talks on implementing the 14-point agreement. Meanwhile, fighting between Israel and Hezbollah continued.

Geopolitical developments are likely to remain a key source of volatility in the near term, while shifts in investor confidence in the durability of the AI rally may also lead to bouts of market swings. Concerns over inflation and tighter monetary policies remain, especially as major central banks all gave hawkish signals over the past week.

But our base case remains that equities can move higher over the next six and 12 months, as we expect continued strength in AI capex, a resilient US economy, ongoing fiscal spending around the world, and strong credit creation to support corporate earnings growth and markets more broadly.

The AI-led part of the market can drive further gains as hyperscalers remain committed to their capex plans. 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 large growth rates, but they are also occurring against a backdrop of demand for AI tokens continuing to outstrip supply. Cloud growth at the major platforms accelerated to 40% year over year in the first quarter, and they reported USD 2 trillion worth of advance orders in compute resources. 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, strong credit creation, and continued fiscal support 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.

We see appealing opportunities in Asia and Europe. We also expect the rally to continue beyond the US market and see compelling opportunities globally. Asia鈥檚 equity markets offer an appealing combination of strong earnings growth, AI leaders, and attractive valuations. We expect MSCI Asia ex-Japan earnings to rise 72% this year, led by North Asia鈥檚 AI hardware supply chain, but we also see underlying strength beyond technology and scope for gains to broaden, particularly if the US-Iran deal proves durable, prompting a rebound in oil and rate-sensitive sectors like airlines, industrials, real estate, and financials. We also like Japan鈥檚 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 first half of the year has 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.