CIO Weekly: Equities Conviction Where It Counts

Rising rates are prompting broad caution, but the better response is selective recalibration, not wholesale retreat. Underlying economic strength, evidenced by resilient data and surprisingly robust S&P 500 earnings growth (Q2 was 52%), argues against indiscriminately trimming risk assets.

However, this strength doesn't support uniform enthusiasm across all markets. We see reason for a more balanced stance on smaller companies due to higher financing costs and moderating estimates. While U.S. large-cap equities remain attractive, driven by AI spending, we must acknowledge potential limits to this cycle and concentration risk in mega-cap tech.

We remain constructive on U.S. large caps, Japan, and China. We are taking a more measured approach to smaller companies, broader developed ex-US markets, and undifferentiated emerging markets. Key risks to monitor include the pace of rate hikes, the breadth of earnings growth beyond mega-caps, and potential AI capital expenditure moderation.