Pictet Asset Management presents its May barometer. Even though there is no end in sight to the Iran conflict, the outlook for both emerging market and US equities remains positive; we upgrade both to overweight.
Asset allocation: calm after the storm
The storm that shook global financial markets appears to have eased, at least temporarily. However, numerous uncertainties remain: the war in Iran continues, vessels remain blocked in the Strait of Hormuz, and oil prices keep rising. Nevertheless, the most pessimistic scenarios outlined a few weeks ago have not materialised, making the current investment climate more favourable.
In this context, investors can once again focus on broadly positive fundamentals: abundant global liquidity, solid corporate earnings, stable economic growth, moderate inflation despite upside risks, and more attractive valuations than two months ago across several asset classes. According to Pictet AM, this justifies a moderately risk-on positioning, in particular through increased exposure to emerging markets, US equities, and industrial sectors.
However, Pictet AM maintains a selective and broadly neutral allocation between equities, bonds, and cash, in order not to rely on a single macroeconomic or geopolitical scenario. Leading indicators continue to point to resilient economic activity in most developed economies and across much of Asia. The central scenario remains global growth of 2.8% this year, with average inflation around 3%.
Risks, however, remain tilted towards weaker growth and higher inflation. A prolonged closure of the Strait of Hormuz could trigger a mild recession in Europe, in certain emerging economies, and potentially in the United States. In such a scenario, oil prices would remain between USD 110 and 120 per barrel, compared with around USD 70 before the conflict.
The impact of the oil shock varies by region. Emerging economies are relatively resilient, particularly energy exporters. In the United States, weaker consumer demand is partly offset by expected gains for oil producers. In contrast, Europe is clearly negatively affected: the recovery outlook weakens and the risk of stagflation increases. Pictet AM has therefore lowered its eurozone growth forecast to 0.9% and raised its inflation forecast to 2.7%.
Liquidity conditions continue, however, to support risk assets. Central banks remain cautious and do not appear in a hurry to tighten monetary policy further. Global liquidity is still expanding by around 7.4%, a level above its historical trend.
Valuations and corporate earnings also support a measured risk-taking stance. Despite the market rebound, valuations remain below the October 2025 peaks. Earnings season has been solid, particularly in the United States, driven by technology, financials, and materials.
Finally, technical indicators point to a renewed but not excessive investor optimism. Leverage remains below average, and markets continue to price in a relatively high level of volatility.
Equities regions and sectors: liquidity and earnings fuel the rally
Despite fragile peace talks between the United States and Iran, high oil prices, and stagflation concerns, several factors support a more positive view on certain equity markets.
Abundant private liquidity and strong corporate earnings—particularly in industrials, in the United States, and in emerging markets—are the main supporting factors. Major indices are also dominated by service companies, limiting the immediate impact of higher oil prices on earnings.
US equities appear particularly attractive thanks to solid earnings, abundant liquidity, and continued investment in industry and AI. S&P 500 companies are expected to deliver earnings growth of around 20% this year and next, the highest level since 2021.
Profit margins are also continuing to improve and are expected to reach record levels by year-end.
In addition, the United States has significant liquidity buffers to absorb potential external shocks. Liquidity generated by money and credit is expected to reach USD 2.5 trillion, or 8% of GDP, compared with USD 1.7 trillion and 6% of GDP last year. In this context, Pictet AM upgrades US equities to overweight.
Pictet AM also upgrades emerging market equities to overweight. Earnings momentum there is strong, and these economies appear relatively protected from rising energy costs.
The macroeconomic backdrop remains supportive, with solid growth and a growth differential versus developed markets expected to reach 2.6 percentage points this year. Emerging markets are also benefiting from the AI cycle, notably through major players such as TSMC, Samsung, and SK Hynix, which represent a significant share of the MSCI Emerging Markets index.
Pictet AM maintains an overweight stance on Chinese equities, supported by stimulus policies and strong export activity linked to AI and industry, within an economy that remains relatively resilient to external shocks.
Pictet AM remains neutral on developed markets ex-US, where valuations are reasonable but uncertainty related to geopolitical tensions persists.
At sector level, Pictet AM upgrades industrials to overweight, supported by global infrastructure investment and the manufacturing recovery. The firm also remains positive on technology, favouring semiconductors and hardware over software, supported by massive investments in AI and data centres.
By contrast, healthcare is downgraded to neutral, while consumer discretionary remains underweighted, weighed down by pressure on purchasing power.
If interested, you can find here the full barometer.
