From the studio

Podcast: Ulrike Hoffmann-Burchardi's Signal over Noise, on and (5 mins)
Podcast: Jump Start | Supply chain disruptions, earnings, and the Fed's outlook (8 mins)
Video: The AI Show | TSMC results and big tech earnings preview (4 mins)
Video: Investors Club | Bonds, gold, and USD outlook after Warsh’s hearing (8 mins)

Thought of the day

The S&P 500 hit another record high on Friday after rising 13% since the end of March. Signs of de-escalation in the Iran war and continued confidence in AI adoption have supported the performance, with the Philadelphia semiconductor index rallying some 47% over the past four weeks.

Multiple risk events are due this week, including policy meetings at the Federal Reserve, the European Central Bank, and the Bank of England, while megacap US tech companies are set to report their first-quarter earnings. Negotiations between the US and Iran remain in the air with the Strait of Hormuz still closed, though Tehran reportedly offered the US a new proposal on reopening the waterway and ending the war.

With Brent crude oil prices approaching USD 108/bbl at the time of writing, market sentiment is likely vulnerable to fresh headlines. But we also believe the case for US equities remains favorable.

Healthy profit growth should continue to drive the bull market. Companies representing just over a quarter of the S&P 500's market capitalization have reported so far, and nearly 80% of them beat sales and earnings per share estimates. The magnitude of earnings beats has ticked up, highlighting that earnings growth has broadened in recent quarters. While travel-related industries reported some pressure due to the Iran war, guidance overall is coming in better than feared. There are also signs of cyclical improvement, including a pickup in non-residential construction in areas such as manufacturing, power, data centers, and infrastructure. We maintain our forecast for a 17% earnings per share growth for the three-month period.

Fed policy should remain supportive. Trump’s nominee for Fed chair, Kevin Warsh, looks set to succeed Jerome Powell next month, as Republican Senator Thom Tillis said he would support Warsh’s confirmation after the Justice Department dropped its criminal case against Powell. It remains to be seen whether Powell will stay on as a governor, but we expect incoming data to allow the US central bank to resume policy easing later this year. Higher energy prices may push annual headline inflation to around 3.8% in the US in the coming months, but we see inflation moderating to 3.3% by year-end. Limited pass-through to core readings, vulnerability in the jobs market, as well as slowing growth in the second half of the year should all support 50 basis points of rate cuts, in our view.

AI adoption is still a tailwind. Recent data points and management commentary continue to show that AI demand remains strong. Several companies across semis, power generation, and electrical systems have posted solid earnings and raised their guidance, while Texas Instruments’ results last week suggested a stronger cycle for analog semiconductors. Ongoing supply constraints in the semis supply chain have also underpinned the latest rally. Investor attention will focus on big tech’s AI monetization and returns on capital this week, but we do not see evidence yet that the broader AI buildout is stalling. Continued AI adoption should help support earnings expectations across multiple parts of the market, in our view, and that remains an important pillar of the US equity story.

So, we keep our Attractive rating on US equites, with a year-end S&P target of 7,500. On a sector basis, we continue to favor consumer discretionary, financials, health care, industrials, and utilities. We recommend investors hold a diversified exposure to the AI theme across sectors and geographies.