Despite the fragilities of US-Iran peace talks, high oil prices and fears of stagflation, there are reasons to be a little more optimistic about the prospects of some global stock markets. Two factors in particular make us optimistic: abundant private liquidity and solid earnings of leading companies, particularly in economically sensitive sectors such as manufacturing and in regions with stronger growth prospects, such as the United States and emerging markets. Additionally, major stock indexes are dominated by largely service-oriented companies, meaning rising oil prices are unlikely to have an immediate impact on overall earnings. This is what emerges from the commentary “Global markets between stock rallies and bond opportunities: the path in a context of energy uncertainty”, edited by the Strategy Unit of Pictet Asset Management.
Regions and equity sectors: Liquidity and earnings fuel the rally
US stocks look particularly attractive, supported by strong corporate earnings, ample liquidity and the ongoing boom in industrial and AI investment. Companies in the S&P 500 are expected to post earnings growth of about 20% this year and next – the highest level since 2021. Of particular note was rising corporate profit margins, evidence of strong cost controls and high nominal economic growth. Margins are expected to reach record levels by the end of this year in all major markets. Equally important, the United States has ample liquidity buffers to protect itself from external shocks. Our calculations show that liquidity created in the United States, both from money and credit, will increase to $2.5 trillion (or 8% of GDP) from $1.7 trillion (6%) last year, all thanks to the Fed’s more favorable monetary policy, strong U.S. bank lending and Treasury buybacks. For these reasons, we have increased the US equity position to overweight.
We have chosen to do the same with emerging market stocks. Companies in these countries enjoy strong earnings momentum and appear relatively insulated from rising energy costs. Growth remains robust: The gap between emerging market and developed market growth is expected to widen to 2.6 percentage points this year, up from 2.4 in 2025. Additionally, the developing world is well positioned to benefit from the AI cycle, as it is home to some of the world’s largest chipmakers, such as TSMC (Taiwan), Samsung and SK Hynix (Korea), the trio that together make up nearly a quarter of the MSCI stock index EM. We maintain an overweight position on Chinese equities. Strong monetary and fiscal stimulus should support domestic demand, while rising AI-related industrial production and exports should boost earnings in a market better able to absorb external shocks.
We are neutral on developed markets excluding the US: equity valuations remain fair, but significant uncertainty remains about the economic impact of the war. At a sector level, we have increased the industrial sector to overweight. Industrial stocks are supported by global infrastructure spending and improving manufacturing trends. Capital spending in the US is growing strongly, with orders for major capital goods rising 11% year-over-year in March.
We maintain an overweight position on technology stocks, but prefer hardware and semiconductor companies to software companies. The valuation discount resulting from the recent sell-off may prove to be only temporary for a broad group of technology stocks, and big tech’s plans to invest in AI data centers and digital infrastructure (estimated at $700 billion this year) justify the premium.
The healthcare sector was downgraded to neutral in response to weakening sector-wide momentum and less attractive earnings prospects compared to other parts of the market. We remain underweight consumer discretionary stocks as rising inflation is expected to weigh on household incomes and discretionary spending.
Fixed income and currencies
An end to the conflict in the Gulf – it continues – does not appear imminent and investors seeking protection from any new volatility in the financial markets could be attracted to government bonds of developed countries. However, their use as a hedge is far from obvious, because bonds are subject to opposing forces. On the one hand, persistent inflationary pressures support higher yields. The ECB and BoE have already signaled further monetary tightening, while a Fed rate cut is in our view unlikely this year, even under Kevin Warsh, who will take over as president in May and appears clearly more accommodative than his predecessor.
On the other hand, it is equally likely that bonds will see their defensive qualities return to the fore. If rising energy prices begin to erode consumer and business confidence, the risks of a recession would increase, likely triggering a bond recovery. For the moment, these conflicting forces leave little room for certainty; we therefore remain neutral on developed market bonds.
the allocation to emerging bonds increases
This does not mean that fixed income markets do not have attractive options that can provide income. Emerging market local currency debt offers a very favorable risk-reward trade-off. Fundamentals have improved significantly: debt levels average around 57% of GDP (well below the 128% seen in G7 economies) and public finances are stronger. As a result, credit quality improves: the ratings of around 80 components of the JP Morgan EMBI emerging market bond index have improved since the beginning of 2024.
Valuations remain attractive. Real yields, particularly in Latin America, are still well above those available in developed markets and provide a solid income cushion. Additionally, currency appreciation offers an additional source of return.
The resilience of emerging market currencies during the latest energy shock is telling. In particular, currencies of oil-importing economies have performed better than previous energy price shocks, suggesting structural improvements and sustained investor demand. Therefore – the experts conclude – we increase the local currency debt of emerging markets to overweight. We also maintain overweight positions in the Japanese yen, which offers reliable protection in a stagflationary environment and the prospect of widening Japan/US interest rate differentials leaves plenty of room for a rebound.
