THINK DIFFERENTLY

Market review

Equities stayed resilient despite a tougher backdrop. Global equities rose 1.3% in Q3, supported by resilient corporate earnings, even as the quarter began with an unwind in crowded AI positions and ended with renewed pressure from oil and rates.
Market gains were uneven: The S&P 500 gained 2.0%, while the KOSPI fell 19.3% and semiconductors declined 11.4% as crowded AI positions unwound.
Oil surged on geopolitical risk: Crude rose 30.1% as renewed US–Iran tensions and Strait of Hormuz disruptions rebuilt the geopolitical risk premium. Oil prices are likely to remain volatile given the unpredictable nature of the conflict.
Bonds came under pressure: The US 10-year Treasury yield rose 82bps to 5.28%, driving a 3.0% decline in US Treasuries.

What is holding equities up?

Earnings remain a key support: Corporate profits continue to underpin equities, with consensus expecting another strong earnings season with 27% year-on-year growth.
AI investment is driving momentum: AI-related capex remains a major contributor to earnings growth, with AI-related companies expected to account for more than half of the S&P 500’s earnings growth.
Positioning looks less stretched: After recent corrections in AI-linked and semiconductor segments, sentiment appears less exuberant than earlier in the year, creating more room for relief if earnings can continue to deliver.
The next test: Markets will look for evidence that AI spending is translating into broader adoption, productivity gains and sustainable profits.

Be selective on fixed income

Bonds came under renewed pressure in September. Long-term yields rose sharply, with bonds falling alongside equities as rate and inflation concerns returned.
2022 comparisons are understandable, but today’s starting point is different. In 2022, bonds were hit by surging inflation, rapid rate hikes and very low starting yields. Today, inflation is more contained, and yields (income) are materially higher.
Higher yields come with a silver lining. Rising yields weigh on existing bond prices, but they also increase the income available on new investments and create a larger buffer against future volatility.
Bond investors can harvest much higher income today than what was available for much of the decade after the 2008 Global Financial Crisis. Our stance is not to avoid fixed income, but to be increasingly selective.

Market outlook

Outlook constructive, but expect a bumpier ride: Growth and earnings remain supportive, though elevated yields and geopolitical uncertainty could keep volatility high.
Equities remain supported by earnings: We see continued opportunities, but narrow leadership makes diversification across sectors and regions important.
Fixed income requires selectivity: We favour short-to-intermediate-duration, higher-quality bonds and remain underweight credit, where spreads offer limited compensation for risk.
Alternatives remain important diversifiers: Gold, catastrophe bonds and royalties can provide return drivers less dependent on interest rates or equity markets.

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