What does the new economic era mean for equities?

The twists and turns of 2025 have somehow reinforced the sense that the global economy is undergoing a structural shift — towards higher inflation, more volatile business cycles and a potential gradual unwinding of decades-long globalisation. Equity markets have been on a rollercoaster ride since US President Donald Trump announced his “Liberation Day” tariffs back in April. Investors who successfully adjusted their portfolios for the associated risks and opportunities have been able to make the most of the ups and downs, but undoubtedly, the risk/return equation has become more complex. However, with flexibility and careful positioning, we think there are reasons to be positive about the outlook for global equities.

A still constructive environment for equities

Geopolitical tensions and trade restrictions remain a source of uncertainty, but the overall macro backdrop is relatively robust. True, inflation is stubbornly high, but not enough to derail central banks’ rate-cutting bias. Coupled with a still decent earnings outlook and widening scope for deregulation and innovation, we think this is a largely positive environment for equities — despite the evident challenges.

In fact, amid a backdrop punctuated by macro volatility, global equities have so far managed to deliver a strong performance year to date — continuing the streak of robust returns delivered over the past few years. Such resilience may have surprised investors, given strong consecutive annual returns since the 2022 bear market, coupled with a fair amount of policy uncertainty. Part of this surprise may stem from investors’ tendency to anchor equity expectations to the long-term average return of 7% – 10% per year, though it’s worth noting that this average reflects a wide distribution of outcomes. Strong years are not anomalies — they are part of the natural rhythm of markets, and while downside mitigation is key, we see opportunities ahead for equity investors.

Where should investors look now?

While the ebbs and flows of the new regime can feel disorientating, it can offer distinct potential for investors who understand the nature of its dynamics and are ready to pivot accordingly. Given ongoing uncertainty, aligning with structural shifts may not only offer greater clarity but also open opportunities for alpha generation.

US exceptionalism and diversification in the age of AI: A weaker US dollar and deglobalisation may diminish US exceptionalism and enhance the case for diversifying US exposures. This doesn’t mean that US large-tech companies have necessarily become any less exceptional, but it’s prudent to consider that the new regime could eventually herald greater dispersion within the US market.

A handful of large technology stocks have dominated the US equity market for years. Today’s market leaders are quite different from those that dominated two decades ago. As AI continues to advance and integrate across industries, the list of top-performing companies may shift again. This serves as a reminder to maintain perspective and avoid complacency. Exceptional US companies may continue to excel, but in this nascent stage of AI, there’s plenty of room for new competitors to grow, succeed and even displace incumbents. Prudent investors will look for opportunities among new and established companies alike, both in historically dominant markets, like the US, and in others, like Asia, where innovative, new AI-focused companies have long runways to thrive.

Europe — structural shifts and long-term potential: Europe is in the midst of structural regime change, and its associated investment in defence and infrastructure could represent a longer-term emerging opportunity. While the nearer-term earnings outlook remains relatively subdued compared to other markets, the fact that Europe appears to be stepping up to its major geopolitical and macroeconomic challenges — evidenced in part by Germany’s fiscal expansion — could offer longer-term appeal. In a diverging and less stable world, Europe could represent a diversifying opportunity in select sectors and companies.

The case for infrastructure continues to build: Unless you expect the world to lose interest in AI, electrification, resource security or digitalisation, it’s hard to see enthusiasm for infrastructure waning any time soon. No economic advance is possible without the right infrastructure to facilitate it. This gives infrastructure intrinsic exposure to the world’s megatrends.

Furthermore, listed infrastructure can play an important role in portfolios, offering the potential for downside protection during times of uncertainty. But it’s a mistake to think that investment in infrastructure will only benefit the universe’s more cyclical companies — in fact, steadily growing companies, with stable dividends, such as regulated utilities, are also likely to be prime beneficiaries of the structural trends driving the next generation of infrastructure.

How to find equity opportunities in the new economic era

Uncertainty and volatility will remain hallmarks of the new economic era, but there are good reasons to be optimistic about equity opportunities. By focusing on structural trends and market opportunities — and remaining flexible — investors can capitalise on opportunities as they emerge.