SUMMARY
When market volatility rises, there can be a temptation to retreat to the sidelines. But with fundamentals strong and AI advancements ongoing, we make the case for staying fully invested while seeking opportunities in the AI supply chain.
KEY TAKEAWAYS:
Amid volatility events, long-term investors should stay invested
Global fundamentals remain robust with strong earnings expected
This is a supportive environment for equities, but we remain vigilant
The U.S. and Emerging Market Asia are core regions for long-term AI exposure
A sustained market drawdown requires lower earnings, which hasn’t happened
We remain constructive on equity risk with the potential for continued opportunity around Al.
Periods of elevated volatility often test investor discipline, but unless the global economic trajectory shifts dramatically to the downside, we believe a key message for long-term investors is to remain invested.
History shows that missing even a small number of the market's strongest rebound days can materially impair long-term outcomes.
Over a 30-year horizon, excluding just the ten best trading days can cut annualized equity returns roughly in half, with those best days most often occurring on the back of sharp drawdowns.
The key assessment, therefore, is not whether markets briefly dip lower, but whether conditions point to a sustained contraction.
While clients should not often attempt to time markets with long-term capital, we continuously evaluate drawdown risk through a disciplined, data-driven framework.
Our investment pillars (macro, fundamentals, valuation, and holistic flow) provide the structure for this evaluation, beginning with the macro regime.
Currently, recent growth and inflation indicators continue to frame the U.S. regime as one of strong nominal growth, and therefore earnings.
Outside the U.S., dispersion is increasing.
European industrial production has softened, and high-frequency consumer sentiment data have rolled over, reinforcing our rotation away from European equities.
In contrast, China's growth data and broader emerging market (EM) trends remain resilient.
Despite ongoing geopolitical tensions and uncertainty around Al-driven disruption, the global equity regime is still broadly supportive of risk for now.
Fundamentals remain a reliable anchor during market stress because they ultimately drive price action over time.
For a sustained drawdown to occur, earnings estimates must move lower.
Historically, a 20% market drawdown coincides with a decline of 10% or more in forward earnings estimates.
That pattern has not emerged during the recent conflict.
Earnings expectations are still remarkably resilient across regions, with expected earnings growth through both revenue and margin expansion.
Even if analysts revise current next-twelve-month growth expectations of 18% for global equities materially lower, earnings would still be growing at a pace consistent with constructive equity outcomes.
Early indicators tied to U.S. earnings growth, including macro variables such as South Korean exports, point to near-term resilience.
As first quarter earnings season begins, U.S. earnings growth appears set to remain the strongest across developed markets, helping to support both domestic and global equity multiples in the near term.
Technical, sentiment, and liquidity signals build an important layer for this fundamental backdrop.
Transactional data for equity markets at the end of March breached a level associated with significant investor de-risking.
However, markets returned to all-time highs in just 11 days - the fastest recovery following an 8% or greater drawdown since 1950 - in a sentiment rebound amid the Middle East conflict de-escalation path.
The Federal Reserve's liquidity posture through balance sheet and open market operations also continues to support risk assets.
One element of the market backdrop that remains difficult to quantify is the Al end-state.
Recent headlines around Anthropic's latest model (Mythos) highlight the continued rapid evolution in this space.
Our key takeaway is this reinforces the critical nature of Al spend for public and private spheres and will likely amplify the need for more compute and memory up the supply chain.
Over the long-term, investors should seek exposure to the core regions of development, innovation, and new market (IPO) entrants: the U.S. and EM Asia.
Over the medium-term, we think thematic exposure to the Al supply chain has the potential to benefit investors as well.
We are also evaluating the cybersecurity and software landscape for companies that Al will leverage, rather than displace, in a world where data security is paramount.
Bottom line: Market technicals point to a potential rebound in sentiment while liquidity remains constructive, building on the supportive macro and fundamental backdrop.
While a great deal can change now that we are back at market highs, solving this balance between fundamentals, regime signals, and sentiment is still at the core of our investment process.
The fast evolution in Al models adds further complexity, and potential opportunity, to the investment picture.
