Following the announcement of the agreement between the United States and Iran, the environment for the equity markets remains overall constructive: the wave linked to artificial intelligence (AI) is driving the entire manufacturing sector, the US economy remains solid, and emerging economies have shown greater resilience compared to past crises. Europe has represented a weak point, but the decline in energy prices should again improve prospects.
Corporate fundamentals in the United States and the European Union appear robust, with strong cash generation, contained financial leverage levels, high profitability, and accelerating productivity gains. Earnings per share (EPS) revisions globally have recorded a marked rebound during the solid first-quarter earnings season, thanks to contained unit labor costs and maintained pricing power, which support margins.
Valuations are above historical averages, albeit to a lesser extent in Europe, but the US technology sector still appears reasonably valued in the short term, with AI continuing to represent a powerful growth driver. The so-called “Magnificent 7” are also interesting in terms of PEG ratio.
We maintain a moderate overweight on equities, supported by favorable financial conditions and a solid pipeline of M&A deals. Our machine learning models also continue to favor stocks over bonds. Within equities, we prefer areas with a more attractive risk-return profile, including US technology, Germany (DAX and MDAX), US mid-caps, and selected emerging markets such as Korea, Poland, and China.
Over a 12-month horizon, we forecast total returns of 7% for the S&P 500 and 9% for the Euro Area markets, with upside potential up to about 13% and 16%, respectively, should earnings expectations be confirmed. The main risks are represented by a possible increase in interest rates and a lower-than-expected return on AI investments.
