Take advantage of US volatility
Investors should seek opportunity amid short-term volatility.
Volatility is expected to rise in the coming weeks. However, we anticipate that US equities will provide significant returns and outperform other markets over the course of the year, driven by stronger structural growth factors, reduced tariff-related economic risks, and healthy earnings growth. Investors should consider approaches to phase in and buy on dips in broad US equities and companies featured on our 鈥淎I鈥� list.
US equities
US equities
The second Trump administration鈥檚 tariff policies have proven more aggressive than expected, and markets have been surprised by the speed of implementation, the size of tariffs levied聽on allied nations, and the administration鈥檚 stated appetite to accept potential near-term economic pain. As a consequence, US stocks have been volatile and have underperformed other global markets.
Fundamentally, we estimate that鈥攁ll else equal鈥攖he effect of tariffs would knock around 2 percentage points off 2025 S&P 500 earnings growth in our base case. We now expect 6% earnings per share growth, and we have accordingly reduced our year-end target for the index to 6,400 (from 6,600). But this also means that, there is still meaningful upside by year end. Despite weaker economic sentiment data, we believe the US economic and earnings backdrop remains healthy, and key structural drivers like AI demand are intact. We anticipate two rate cuts from the Fed this year, as inflation aligns more closely with the central bank's target. With sentiment being pessimistic, we expect buyers to return as positive news emerges.
Artificial intelligence
Artificial intelligence
While uncertainty related to AI monetization may also have played a role in recent volatility, we continue to believe that low-cost models like DeepSeek鈥檚 R1 will successfully coexist alongside leading frontier models and do not undermine the structural AI trend. Scale increasingly matters as large language models develop to become reasoning models. R&D intensity, measured as R&D spending divided by revenues, is higher in the US, at 13.5%, compared to 8% in China. However, this higher intensity is supported by the robust gross margins of US cloud platforms, which stand at around 70%, versus 50% for their Chinese counterparts. We believe this advantage allows US companies to invest more heavily in R&D without sacrificing profitability.
We expect compute to remain a major component of AI spending, fueled by demand and innovation. We foresee industry revenues growing 30% annually through 2029, with a significant 75% increase in 2025. Recent volatility and lower valuations present a favorable risk-reward scenario.
