As economic indicators start to roll over, the market is questioning 'US exceptionalism', with the leadership of technology/AI stocks being challenged in an environment of uncertainty and high starting valuations. Technical indicators for the Nasdaq and S&P 500 have turned neutral for the first time in a year. Earnings estimates for 2025 are still forecast to grow at 10% YoY, led by AI-driven tech, financials, and industrials. However, margin pressures persist in discretionary sectors due to wage inflation and rising costs. Labour market stability provides support for domestic demand, but we must watch consumption patterns for the lower to middle class households as this could limit consumption in the latter half of 2025, and we could see inflationary pressures re-emerge.

The S&P 500 trades at 21.5x forward P/E, above the 30-year average of 16.9x, indicating limited room for upside in aggregate unless earnings accelerate significantly. The top 10 stocks in the S&P 500 account for 38% of market cap, reflecting high concentration risk. Despite this, broader participation in earnings growth is emerging.

In the Eurozone, GDP growth remains subdued at 1.2%, constrained by weak industrial production, particularly in Germany, and persistent inflation. Corporate earnings are forecast to grow 3.2% YoY in 2025, with healthcare and utilities leading defensive sectors, while industrials and materials struggle with input cost pressures.

The recent German election combined with a push to collaborate defensively across Europe has provided a catalyst for fiscal stimulus which has led to a reassessment of Europe’s medium term economic prospects. Eurozone equities trade at 13.9x forward P/E, in line with historical averages and offering a relative discount to global equities. UK equities provide attractive valuation opportunities, with high dividend yields and depressed valuations in energy and financials.

Fund flows into European equity funds turned positive in late 2024, reflecting improving investor sentiment, but at a slow pace. Shorter term performance has improved, however, medium- and long-term momentum at a relative and an absolute level for European equities remains very weak.

Japan GDP growth is forecast at 1.3%, supported by improving corporate governance and robust export activity amid yen weakness. Earnings growth of 8% in 2025 is expected, led by technology and automotive sectors, while domestic consumption remains stable due to government stimulus. The impact of reshoring trends in the semiconductor and high-tech supply chains could provide additional upside for Japanese manufacturers.

Japan trades at a forward P/E of 14.7x, significantly below US and global markets, with attractive dividend yields and share buybacks supporting valuations. Export-heavy sectors, like technology and autos, remain undervalued relative to global peers. Technical support levels indicate strong buying interest from both domestic and international investors, particularly in export-driven sectors. Despite the consolidation in the market for most of 2024, in absolute terms, Japan looks attractive across most periods and technically has reached levels where we can see a potential bounce.

Emerging market (EM) GDP growth of 4.1% is being driven by strength in Asia, particularly India and Southeast Asia, benefiting from AI investments and supply chain realignments. Earnings growth is projected at 18% for 2025, led by technology and consumer sectors in Asia, while LATAM remains challenged by commodity volatility. EM equities trade at a forward P/E of 12x, significantly below developed markets (US at 21.5x, Europe at 13.9x), offering attractive long-term entry points. Regional valuation disparities provide opportunities, with India and Taiwan trading at premiums, while Brazil, Mexico, and the UAE remain undervalued.

EM and Asia are weak in the shorter term, while Asia on a medium term and longer-term basis is on the verge of breaking lower. Flow data suggest a sharp turnaround in positive flows towards China.