More to go in equities
Positive US economic surprises, the growth potential of Chinese stimulus, and global rate cuts create a favorable environment for equities.
We expect global stock markets to benefit from falling rates, positive earnings growth, and potential Chinese stimulus. AI innovations continue to drive growth, with the US an Attractive market. We target 6,600 on the S&P 500 by end-2025. We favor small and mid caps in Europe, and diversified exposure in Asia, particularly Taiwan and India.
Beyond AI opportunities, we see more room for gains in the following parts of global stock markets:
US equities
US equities
We upgrade US equities to Attractive and particularly like technology, financials, and utilities for the following reasons:
- Economic activity is more resilient. The last nonfarm payrolls picked up, and the three-month trend looks encouraging. Payroll increases have been healthy enough to absorb labor supply growth. Recent revisions to the last five years’ data show that GDP growth has averaged 2.5% per year since 2019. And inflation data, while volatile month to month, continues to overall trend toward the Fed’s 2% target. Investors are increasingly thinking about a “no landing” rather than “soft landing.”
- We expect earnings momentum to broaden. We expect S&P 500 EPS growth of 5-7%, reflecting an earnings beat of about 3%. Growth would be in the high-single digits, excluding the energy sector. Overall, we believe the environment remains constructive for US equities. Earnings growth is broadening out. We continue to expect 11% S&P 500 EPS growth (to USD 250) this year and 8% growth (to USD 270) in 2025. While the election outcome adds a layer of uncertainty, we don't think any potential policy changes stemming from the election will significantly alter the environment.
- Continued US rate cuts can bode well for returns. Historically, when the Fed is easing policy in the context of a soft landing, equities rise 18% on average in the 12 months after the first Fed rate cut. With the Fed signaling that it wants to stay ahead of the curve to mitigate any recession risks, we are nudging up our June 2025 S&P 500 price target from 6,200 to 6,300. We also introduce a December 2025 price target of 6,600.
Eurozone small- and mid-cap stocks
Eurozone small- and mid-cap stocks
We like smaller and mid-sized companies in the Eurozone for the following reasons:
- Economic conditions look set to improve. We expect real GDP growth to accelerate, while rising wages and falling inflation should lead to an increase in consumption. The European Central Bank’s continued rate cutting should lead to less restrictive financial conditions and lower interest rates, which support this segment, given their higher dependence on bank lending and variable rate debt than large-cap stocks.
- This segment should benefit from transformational themes. Industrial activity should begin to recover too, driven in part by structural growth trends from the energy transition(s), i.e., increased electric power generation and decarbonization, as well as nearshoring (automation).
- Valuations look compelling. European small and mid caps (MSCI EMU SMID) are currently trading at a 20-year low price-to-earnings ratio compared to large caps (MSCI EMU), making them too attractive to overlook, in our view.
Asia ex-Japan stocks (including India)
Asia ex-Japan stocks (including India)
We like Asia ex-Japan stocks (including India) for the following reasons:
- The region is especially sensitive to falling US and regional interest rates. Asia ex-Japan equities generally benefit and rerate when US and local rates fall.
- One of the most appealing earnings growth profiles. Asia ex-Japan equities range from North Asian AI beneficiaries to countries with structurally high GDP growth and favorable demographics (like India). We forecast 14.8% earnings growth in USD terms for the region in 2025, while Indian stocks could experience 12% EPS growth in fiscal year 2025 (MSCI India) and a revival to around 14% growth thereafter.
