Equities may have enjoyed a good rebound, but the set-up is not great over the short term. Europe and Asia ex-Japan are relatively brighter spots, even though there is not likely to be a meaningful decoupling from US stocks. We have a more constructive view over a 12-month horizon for equities.

Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited

Bond yields are moving up for the wrong reasons, and this could persist over the following months due to a pickup in tariff-driven inflation and rising fiscal concerns, along with softening economic activity given the frontloaded orders. This combination is not great for equities over the coming months, especially since they have enjoyed a good rebound.

We continue to see relatively brighter spots in non-US equities such as Europe and Asia ex-Japan, even though there is not likely to be a meaningful decoupling from US stocks. During times of uncertainty, we would favour defensive names which have strong pricing power and exhibit resilient earnings.

Over the next 12 months, we remain positive on equities in Europe and Asia ex-Japan.

Ongoing policy uncertainty in the US is making non-US investments more appealing, with Europe standing out due to its supportive government spending, central bank policies, and relatively low equity valuations.

In Asia (excluding Japan), we continue to prefer equities in Hong Kong/China, Singapore, and the Philippines.

US: Relief rally on reduced tail risks

The S&P 500 Index saw a relief rally in May, rising above pre-Liberation Day levels, though it is still below this year’s highest point. This rebound was mainly due to quicker-than-expected progress in trade talks, especially between the US and China, which helped ease fears of a recession. Although Trump briefly reignited concerns by threatening to raise tariffs on the EU from 20% to 50% on 1 June, he later backed down and extended the deadline to 9 July.

Despite this, we expect market volatility to remain high until firm trade agreements are reached, as policy shifts could still cause sharp market movements.

Looking ahead, economic growth may pick up from late 2025. Trump’s pro-growth policies—like deregulation and tax cuts—could gain attention again, particularly with the 2026 US midterm elections approaching. However, concerns about government debt may weigh on the US Dollar, which could support company earnings to some extent, though rising long-term yields might offset this.

In the short term, with no clear drivers for growth, we expect markets to stay within a narrow range. We’re keeping our S&P 500 Index targets unchanged, with a base case of 5,800 and a bullish scenario of 6,200.

Europe – A safer haven

Unless there’s a major rise in trade tariffs or a global slowdown, Europe’s economy is expected to strengthen from 2026. This growth will likely be supported by:

• Increased government and defence spending
• A possible end to the Russia-Ukraine war, which could lower energy prices and boost confidence
• Interest rate cuts by the European Central Bank (ECB)

Compared to regions like the US, Europe benefits from more supportive economic policies and relatively low stock valuations. We believe the region’s potential for bold reforms and coordinated action is underappreciated. If external risks grow, Europe may respond with stronger measures that could further boost growth.

The easing of US-China trade tensions is also good news for Europe, which has strong trade links with both countries.

We’ve raised our MSCI Europe Index targets to:

• Base case: 205
• Bull case: 218
• Bear case: 152

Our base case assumes a forward price-to-earnings (P/E) ratio of 16.5x and 6.5% earnings growth over the next 12 months.

Key risks include renewed tariff threats, such as Trump’s proposed 50% tariff on European goods. We continue to favour companies benefiting from defence and infrastructure spending, as well as those involved in energy efficiency and the green transition.

Japan: Neutral position still warranted

Japanese equities have rebounded in both yen and US dollar terms. However, we’re keeping a Neutral view, as the balance of risks and rewards remains even.

• Cautious Outlook: Company forecasts for the financial year ending March 2025 have been weaker than usual, and earnings revisions are still mostly negative. Many companies are assuming a USD/JPY rate of 145, while we expect it to be closer to 132 over the next year—this could lead to earnings disappointments.
• Positive Signs: On the upside, Japanese firms announced share buybacks in 2Q2025, showing year-on-year growth and higher payout ratios. Foreign investors have also been net buyers for seven straight weeks, totalling ¥2.58 trillion.
• Updated Forecasts: With some improvement in global trade tensions, we’ve raised our earnings and valuation forecasts. Our new MSCI Japan Index targets are:
  • Base case: 1,721
  • Bull case: 1,978
  • Bear case: 1,358

• Investment Focus: We prefer domestic-focused companies in non-manufacturing sectors and remain cautious on exporters, especially carmakers. Asia ex-Japan: Higher index targets amid positive tariff developments

The MSCI Asia ex-Japan Index rebounded strongly in May 2025. We remain positive on equities in China, Hong Kong, Singapore, and the Philippines, while keeping lower allocations in Thailand and South Korea.

• China: We favour offshore Chinese stocks in the near term, supported by easing trade tensions with the US.
• Singapore & the Philippines: Earnings forecasts for 2025 have held up relatively well, supporting our constructive view.
• South Korea: We remain cautious due to ongoing export weakness and a subdued outlook from major firms like Samsung and SK Hynix.
• Thailand/strong>: Economic growth remains weak, and local fund managers have raised cash levels to near two-year highs.
• India & Indonesia: Despite recent rebounds, we are keeping our positions unchanged due to high valuations in India and political/policy uncertainty in Indonesia.

Following the US-China trade truce, we’ve raised our earnings forecasts and valuation assumptions. As a result, our MSCI Asia ex-Japan Index targets are now:

• Base case: 856
• Bull case: 947
• Bear case: 584

China/HK – De-escalation in trade tensions

Tensions between the US and China have eased after both countries agreed to roll back tariffs for 90 days. This is likely to boost market confidence in the short term. However, it may also reduce the urgency for Chinese policymakers to introduce further economic stimulus.

As a result, we now prefer offshore Chinese equities in the near term, given the improved trade outlook and the possibility of slower stimulus measures. We've adjusted our MSCI China Index targets to:

• Base case: 25,400
• Bull case: 26,900
• Bear case: 20,100

First-quarter 2025 results showed some improvement, with more companies beating earnings expectations. Although the MSCI China Index’s 2025 earnings forecast has been revised down by 1% so far this year, there’s potential upside from growing adoption of artificial intelligence (AI). Valuations remain attractive, with the index trading at 10.3 times forward earnings—about 10% cheaper than the MSCI Emerging Markets Index.

Hong Kong has seen a rise in listings of top-tier mainland Chinese companies since 3Q2024. So far this year, around 30 IPOs have raised HKD 77 billion. With over 120 IPOs in the pipeline, we expect a strong recovery in Hong Kong’s IPO market in 2025.

Global Sectors: Dispersion driven by idiosyncratic factors

Over the past month, the IT, Communication Services and Industrials sectors have led the pack, while the Healthcare sector has lagged the rest, dragged by concerns over policy uncertainty ahead, particularly around pharmaceutical tariffs, the most favoured nation policy, and healthcare reforms in the US. We get the sense that generalist investors are adopting a wait-and-see approach with regards to the Healthcare sector given the level of uncertainty currently.

Tech still broadly holding up

With the US reporting season almost wrapped up, investors have come away with a few key takeaways. First, monetisation gains from generative AI are still somewhat limited, with large advertising platforms being the main beneficiary at this juncture. Second, cloud demand continues to remain robust on the back of both cloud migration and AI spend, while supply challenges faced by some should gradually abate in the months ahead. Third, fundamental AI semiconductor demand remains strong, but broader concerns over export bans/controls remain. Within China tech, the key debate on increasing competition, especially in areas like food delivery, continues to be a headwind, but valuations remain broadly attractive for many names at this juncture.

Defence stocks – the New Guard

As for Industrials, the sector has been supported by more positive sentiment on Aerospace and Defence stocks. Interest in the aerospace and defence sector continues unabated, supported by

1. expectations of greater defence spending in Europe with the turning of the fiscal tide.
2. gradual alleviation of concerns relating to spending cuts in the US related to the Department of Government Efficiency (DOGE)
3. plans for a Golden Dome in the US
4. India-Pakistan tensions, and
5. media reports that Israel may be targeting Iran’s nuclear facilities.

We believe there are structural shifts taking place which lend support to a constructive longer-term view for names in the defence sector, though valuations have also risen to reflect brighter prospects. US names, however, have not re-rated significantly in comparison to other global peers and there is room for catch-up especially if favourable developments relating to defence budgets are confirmed.