Mid-Year Market Outlook: Looking Beyond the AI Trade

Mid-Year Market Outlook: Looking Beyond the AI Trade

By Angel Sanz, CIO, NS Partners

The first half of the year was marked by significant geopolitical events, evolving inflation expectations and continued enthusiasm for artificial intelligence. Despite periods of uncertainty, global equity markets remained remarkably resilient.
With oil prices now back to pre-crisis levels, we believe investors should focus once again on the key drivers of long-term returns: economic growth, inflation and corporate earnings.

Inflation Should Remain Under Control

Provided the geopolitical situation remains stable and energy prices remain around current levels, inflation should continue to trend lower across developed economies.
Our central scenario is one of moderate but healthy growth, accompanied by inflation that gradually returns towards central bank targets. In this environment, we do not expect major monetary tightening from either the Federal Reserve or the European Central Bank in the coming months.

The AI Opportunity Remains Intact, But Valuations Matter

Artificial intelligence continues to be one of the most powerful structural themes in global markets. As discussed in our most recent chart of the month, Will Artificial Intelligence Change Equity Market Returns?, AI has the potential to reshape productivity, profitability and long-term market returns. While we remain constructive on these long-term opportunities, investors should distinguish between the structural impact of AI and the valuation risks that can emerge when enthusiasm becomes concentrated in a narrow group of stocks.

At NS Partners, we therefore believe portfolio construction should remain disciplined. We have reduced exposure to selected AI and semiconductor-related investments and reallocated capital towards areas where valuations remain more compelling.

Beyond the AI Trade: Where Opportunities May Emerge

Market leadership rarely remains concentrated indefinitely.
While AI-related businesses continue to attract substantial investor attention, many high-quality companies in other sectors have experienced limited share-price appreciation or have even declined despite solid fundamentals.
We have increased exposure to selected defensive businesses, including companies operating in:

• Medical technology

• Industrial innovation

• Electrification and infrastructure

• Essential service providers

These businesses offer attractive long-term growth potential while currently trading at valuations that we believe better reflect the underlying fundamentals.

Diversification Remains Essential

One of the key investment risks today is assuming that current market trends will continue forever.
Technology giants continue to announce substantial AI-related capital expenditure programmes. While we do not question the importance of these investments, it remains uncertain whether spending can continue at the same pace indefinitely.
Even a modest reduction in future investment plans could significantly affect the companies that have benefited most from the AI boom.
For this reason, diversification remains a central pillar of our approach. We seek balanced exposure to a broad range of quality businesses rather than relying excessively on a single investment theme.

Constructive on Equities

Despite elevated valuations in parts of the market, we remain constructive on global equities over the next twelve months.
Corporate earnings growth remains positive and should continue to support equity markets. Our investment process remains fundamentally driven, focusing on quality companies, attractive valuations and sustainable earnings growth rather than geographic preferences alone.
The United States continues to offer numerous opportunities thanks to its innovation leadership, energy independence and entrepreneurial culture. At the same time, attractive opportunities exist in other markets and sectors that have received far less investor attention over recent years.

Preserving and Growing Capital

Our clients expect disciplined investing rather than speculative bets.
The objective is not simply to participate in the market’s strongest trends, but to build portfolios capable of generating attractive long-term returns while preserving capital through changing market conditions.
As markets evolve, we remain committed to identifying durable businesses, maintaining valuation discipline and adapting portfolios when opportunities shift.
In investing, as in nature, adaptability remains one of the most valuable qualities.

Source

This article is adapted from an interview with Angel Sanz, Chief Investment Officer of NS Partners, originally published by Allnews in French.

Read the original French interview:
NOUS AVONS DIMINUÉ L’EXPOSITION À L’IA ET AUX SEMI-CONDUCTEURS 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. 

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