Equities keep climbing the wall of worry, pushing to new all-time highs even as investors fret about growth, policy, and geopolitics. Yet the underlying mood is anything but euphoric. The widely followed bull-bear indicator has slipped back into negative territory, while discretionary investors have shifted from neutral to slightly underweight in equities. Such cautious positioning signals that equities are not a crowded trade and that any pullback would likely be met with ready buyers.

Valuation concerns resurface

The S&P 500 trades at roughly 21 times next year’s earnings – a level that sounds lofty and invites calls for a correction. However, history offers a more nuanced view. High price/earnings multiples on their own have little predictive power for short-term returns. What consistently drives markets over tactical horizons are profit growth and the trajectory of monetary policy. Past episodes make the point clear. 

In 1999 and again in 2021, equities advanced strongly despite elevated valuations because earnings momentum was robust and the Fed remained supportive. By contrast, the drawdowns of 2000 and 2022 followed a stall in profits and tighter policy. Today’s set-up looks closer to the former pattern: corporate earnings are trending higher and the Fed is preparing to cut rates rather than raise them.

Taken together, these factors argue that rich valuations are not a catalyst for an imminent downturn. As long as earnings keep expanding and monetary policy turns more accommodative, equities can remain elevated – and may well grind higher into year end. 

Emerging market equity gains are sharply concentrated in a few Asian technology stocks with AI exposure

The MSCI Emerging Markets Index has gained 23% year to date, breaking above the 1,300 level for the first time in four years. However, we see a highly concentrated rally, with a handful of Asian technology and AI-related names driving nearly half of the upside.

Notably, Taiwan and South Korea have emerged as primary beneficiaries of AI-driven demand, whereas China benefits more selectively, and other regions continue to lag. We believe this dynamic reflects a structural shift: emerging markets equity performance is becoming increasingly dependent on global technology cycles, particularly those linked to AI – rather than being driven by traditional factors such as commodity prices or broad macroeconomic momentum. 

Consequently, the current concentration poses challenges to our frameworks of previous emerging markets bull markets used to evaluate emerging markets outperformance. Particularly, as the asset class was heavily weighted toward commodities, with oil & gas and materials comprising around 25% of the index. Today, this exposure has fallen to roughly 10%.