What’s the story?

Broadening global growth and easing inflation mean that equities remain in a secular bull market. We still like quality growth stocks but see opportunities beyond the Magnificent 7 in the US, our favourite market, and would allocate fresh capital to more cyclical equity market segments, such as mid-cap and industrial stocks. There are good reasons to expect a fertile market environment in the second half of the year as the new growth cycle unfolds, and we do not see market corrections as protracted periods of decline but rather as times to invest.

Our positive outlook for equities is based on an emerging growth cycle, with the US still in expansion mode, industrial production in China rising, and global restocking supporting trade and European economies. Equities remain in a bull trend, and market corrections present opportunities to invest as the growth cycle unfolds and inflation decreases. The second half of the year offers significant promise to equity investors, with geopolitical fears and US election concerns leading to more volatility but also potentially providing attractive entry points.

US equities beyond the Magnificent 7

The US equity market remains our top choice due to the country’s continued growth and favourable investment environment. While the Magnificent 7 stocks (i.e. Alphabet, Amazon, Apple, Meta, Microsoft, Tesla, and NVIDIA) have been the leaders, their earnings growth is expected to slow, with stronger earnings growth anticipated in the rest of the market, including mid-cap stocks. Thus, US equities beyond the Magnificent 7 are expected to benefit from ongoing economic growth, investments in artificial intelligence (AI) across industries, reindustrialisation, and the development of a greener economy.

AI is very real

Our preference for quality growth stocks is closely tied to the durability of the AI investment cycle, which benefits from companies integrating new AI-powered tools to optimise functions, cut costs, and ultimately improve the value added for their clients. The investment boom triggered by AI is very real and keeps demand for cloud services and cutting-edge semiconductors strong.

Mid-caps are in a cyclical sweet spot

The current equity market rally has been driven by large-cap stocks, but the advance has been more balanced since the beginning of the year. With the strength of the US economy and positive cyclical signs from Europe and China, mid-caps, which as a group are more cyclical, are joining the rally and offer catch-up potential. We favour quality within mid-caps, as high financing rates will continue to challenge lower-quality, more-indebted companies. This focus on quality also includes exposure to Swiss mid-caps, which are among the highest-quality companies in terms of balance sheet and product strength.

Industrials are rising

In terms of sectors, we are focusing on industrials. Our positive view is based on a number of factors, including:

1. Attractive valuations that are tied to both structural growth themes, such as electrification, and to positive cyclical drivers, such as Chinese credit impulses that favour European industrials.
2. An accelerating restocking cycle.
3. Leading economic indicators that point to growth.

The industrial sector accounts for ca 25% of Germany’s benchmark DAX index, reflecting the latter’s more cyclical nature, with companies’ sales largely exposed to the strengthening global cycle.

Next Generation themes with cyclical drivers

We see promising earnings growth for the companies in our Next Generation Automation & Robotics and Future Cities themes, which benefit not only from structural factors but also from positive cyclical drivers. Both themes have many industrial companies as thematic leaders. In the case of Automation & Robotics companies, their earnings are expected to benefit disproportionately from greater order intakes. And our Future Cities theme is supported by the need to increase the energy efficiency of buildings and, more cyclically, by the potential boost to construction activity from the expected drop in interest rates and construction costs.

China is back for now

Within emerging markets, we still like Brazil, India, South Korea, and Taiwan. However, Chinese equities have rebounded sharply from their January lows and are now enjoying positive momentum, supported by economic green shoots and further signs of policy support.

Japan is back for longer

Structural reforms are a game changer for Japanese equities, which are also benefiting from the amount of capital being channelled into making Japan the next semiconductor hotspot. With the currency at multi-decade lows, Japan is a destination for tourists and a good opportunity for investors to build exposure to a structurally attractive market that is showing strong earnings growth. Thus, it is not too late to invest in Japanese equities, even after their rise. The same holds true for global equity markets overall.