- With elevated equity valuations, investors should focus on identifying markets and sectors where earnings visibility is strong and growth is sustainable.
- The S&P 500’s January returns were led by just five tech stocks. Structural growth elsewhere is limited, so investors can go for a more targeted and selective approach in the Digital Economy.
- Structural reforms, stronger corporate profitability, and supportive policy continue to transform Japan’s corporate landscape, justifying the premium on Japanese equities and reinforcing our bullish conviction.
- Europe serves as a diversification play, offering broader sector exposure beyond technology as well as currency diversification.
Despite the brief sell-off in early February, markets quickly found their footing and pushed back to record highs. That said, with valuations clearly above historical averages (Figure 1), the margin for error has narrowed. Disappointments, whether from earnings, inflation, or policy, can trigger sharper bouts of volatility.
Figure 1: Most regions are trading at historic highs
Elevated valuations, however, do not mean opportunities are scarce. What matters most is what is driving those valuations. In some cases, premiums are underpinned by durable earnings growth and structural tailwinds. By focusing on markets and sectors where growth is sustainable and earnings visibility is clear, investors can still find compelling opportunities, even in major developed markets.
US: Internet leaders offer attractive long-term opportunity
US equities started the year on a volatile note, with the S&P 500 hitting fresh all-time highs and briefly crossing the historic USD 7,000 level in January.
As widely expected, the Federal Reserve held interest rates steady, pushing back against calls for an early rate cut. Chair Powell was clear in his messaging: resilient GDP growth, low unemployment, and stubborn inflation give the Fed little urgency to ease policy. Leadership developments, including the nomination of Kevin Warsh as the next Fed Chair, have naturally sparked discussion about future policy direction. For now, however, the Fed’s independence and data-driven approach remain intact. In our view, aggressive rate cuts in 2026 remain unlikely.
Market leadership also continues to be narrow. A small group of mega-cap stocks, particularly in semiconductors and AI-related names, continues to drive a disproportionate share of index gains. In January, just five tech stocks accounted for over 70% of the index’s performance (Table 1). These companies may be fundamentally strong and continue to benefit from structural AI trends, but such concentration leaves little margin for disappointment should earnings growth moderate.
Table 1: Top drivers of S&P 500’s gains in January
|
Company / Index |
January Performance |
Contribution to Index Return |
|
Alphabet |
8% |
17% |
|
Micron |
45% |
17% |
|
Meta Platforms |
9% |
14% |
|
Nvidia |
2% |
13% |
|
Amazon |
4% |
10% |
|
S&P 500 Index |
1% |
- |
|
Performance in USD terms Source: Bloomberg Finance L.P., iFAST Compilations Data as of 31 January 2026 |
||
Beyond the AI theme, structural growth drivers across the broader US market remain limited. As such, rather than owning the US market indiscriminately for its technology exposure, investors can go a more targeted and selective approach.
Following the recent sell-off, valuations across the internet sector have become more reasonable, while long-term growth drivers remain underappreciated. Internet companies, represented by the Nasdaq CTA Internet Index, is currently trading at around 21 times forward earnings – its lowest multiple in a decade, presenting an attractive long-term opportunity.
Within this space, several high-quality companies continue to stand out. Alphabet dominates the AI application layer, where real monetisation happens, from search to cloud and productivity tools. Amazon is another clear beneficiary, with AWS margins structurally expanding as scale, efficiency, and AI adoption accelerate. Microsoft also remains at the forefront of the AI race. Its leadership in cloud computing and its deep integration of AI into productivity software continue to support significant upside potential.
For a diversified exposure, investors can consider the Invesco NASDAQ Internet ETF (NASDAQ:PNQI).
Japan: Policy stability further supports structural strength
The Nikkei 225 Index has soared past JPY 58,000 on 12 February, hitting a record high. This rally is supported by a weaker yen and renewed political momentum following the announcement of a snap election. Investors are increasingly pricing in policy continuity and reform-friendly leadership, a trend often referred to as the “Takaichi Trade.”
To be clear, Japan’s gains are not just about politics. Strong earnings growth is being driven by structural tailwinds, including economic normalisation and semiconductor advancement initiatives (Table 2). Ongoing corporate governance reforms are also helping companies deliver stronger returns for shareholders. The Nikkei 225 Index’s return on equity (ROE) has now crossed 10%, compared with the mid-single digits a decade ago, when companies prioritised survival over returns. Back then, massive cash holdings and cross-shareholdings bloated equity bases, suppressing ROE. Today, Japanese companies are narrowing the gap with developed market peers, such as Europe, where average ROE is around 13%.
Table 2: Earnings growth forecast of top 10 Nikkei 225 constituents
|
Name |
Description |
12 Month Forward Earnings Growth |
|
Advantest Corp |
A global leader in chip testing. Produces the automated test equipment (ATE) used by giants like Nvidia and AMD to ensure their AI chips work before shipping. |
41.3% |
|
Tokyo Electron |
A global leader in chip-making machinery, with a near-monopolistic position in several critical segments of the semiconductor production equipment market. |
16.3% |
|
Recruit Holdings |
A global leader in HR technology. Owns Indeed and Glassdoor. |
15.8% |
|
TDK Corp |
A global leader in smartphone batteries and magnetic parts. |
14.9% |
|
Fanuc Corp |
The world’s largest maker of industrial robots. |
13.6% |
|
Chugai Pharmaceutical |
A subsidiary of Swiss healthcare giant Roche, the company is a leading drugmaker focused on cancer and antibody treatments. |
11.6% |
|
Shin-Etsu Chemical |
The world’s largest manufacturer of silicon wafers |
8.4% |
|
KDDI Corp |
One of Japan’s largest telecom operator |
7.5% |
|
Fast Retailing |
The parent company of UNIQLO |
7.2% |
|
Softbank Group Corp |
The biggest backer of late-stage AI and tech startups globally |
-65.4% |
|
Source: Bloomberg Finance L.P., iFAST Compilations Data as of 31 January 2026 |
||
Meanwhile, Japan’s bond markets have stabilised as fiscal pressures begin to ease. Following the lower house election, the ruling Liberal Democratic Party (LDP) secured a decisive victory and proposed a time-limited, two-year suspension of the food consumption tax. With reduced political pressure from opposition parties advocating indefinite tax cuts, the administration is now better positioned to pursue a more balanced fiscal stance. This helps moderate upward pressure on Japanese government bond yields that could otherwise result from excessive fiscal expansion, providing a supportive backdrop for equity valuations.
Japan’s long-term growth story remains firmly intact. Structural reforms, improving corporate profitability, and supportive policy continue to drive a meaningful transformation in the corporate landscape. In our view, this also justifies why Japanese equities are trading at a premium to historical levels and reinforces our conviction to remain bullish on Japan.
Value-oriented strategies, such as Eastspring Investments - Japan Dynamic AS SGD, are relatively well cushioned against potential near-term volatility due to their disciplined valuation approach. At the same time, the fund maintains meaningful exposure to Japanese small-cap companies, offering investors access to domestically driven, resilient businesses that remain undervalued relative to large caps as the market rally broadens beyond the largest names.
Europe: An important portfolio diversifier
European equities are quietly doing well. The STOXX 600 Index is hovering near record highs, though with far less fanfare than markets elsewhere.
Inflation across the Eurozone has been trending lower, giving the European Central Bank room to gradually move towards a more supportive stance. Financial conditions are no longer tightening aggressively, easing pressure on both consumers and businesses. At the same time, European equities still trade at a discount to the US.
Financials are benefiting from a more constructive regulatory backdrop. European banks, in particular, are deploying record capital buffers through share buybacks, reinforcing shareholder returns and improving investor confidence. Meanwhile, defence spending is becoming a structural growth driver as NATO commitments rise. Increased defence-led investment is supporting broader industrial activity and could lift cyclical sectors over time.
Healthcare is another bright spot, offering a compelling blend of resilience and growth. The sector is entering a catalyst-rich phase, with a wave of important clinical trial readouts ahead, particularly in areas such as cancer and obesity (Table 3). Major players such as AstraZeneca, Novartis, Novo Nordisk, and Roche – all among the top 10 constituents of the STOXX 600 Index – stand to benefit from these developments. These breakthroughs can drive strong, company-specific performance that is largely independent of the broader economic cycle, making healthcare an attractive defensive growth allocation.
Table 3: Europe healthcare readouts
|
Company |
Drug |
Event |
Timeline |
Why it matters |
|
AstraZeneca |
Camizestrant |
Phase 3 Readout |
2H 2026 |
Late-stage oncology asset for AZ, positioned as one of the key drivers for the company's 2030 revenue ambition of USD 80 billion |
|
Novartis |
Pelacarsen |
Phase 3 Readout |
1H 2026 |
A litmus test for "Lp(a)"; a genetic cholesterol risk factor previously untreatable. Success opens a massive new preventative market |
|
Novo Nordisk |
CagriSema |
FDA Decision / Launch |
Late 2026 |
Approval would cement Novo's position with a drug that offers around 25% weight loss |
|
Roche |
CT-388 |
Phase 3 Initiation of Development |
1Q 2026 |
Although Roche is a late entrant into the highly competitive obesity market, the data strength represents a significant positive development |
|
Giredestrant |
Phase 3 Readout |
1H 2026 |
Roche's answer to AstraZeneca's Camizestrant. The winner of this head-to-head race takes the massive ER-positive breast cancer market |
|
|
Divarasib |
Phase 3 Readout |
2026 |
A key asset within the company's oncology pipeline |
|
|
Source: Company filings, iFAST Compilations Data as of 31 January 2026 |
||||
In short, Europe provides sector diversification. Unlike the US, which is heavily concentrated in technology, Europe offers meaningful exposure to financials, industrials, healthcare, energy. These are sectors that can perform differently across market cycles and help smooth portfolio volatility. Europe also offers currency diversification. Exposure to the euro can provide balance in a global portfolio, particularly in periods when the US dollar weakens or global capital flows broaden beyond the US. For a low-cost, diversified way to access this opportunity, we recommend the Vanguard FTSE Europe ETF (NYSE:VGK).
Looking beyond the US
While the long-term outlook for US equities remains positive, elevated valuations mean the risk-reward is less attractive today. Instead, we see attractive opportunities across other developed markets. Japan remains supported by ongoing corporate reforms, and favourable economic dynamics. Europe plays a stabilising role, offering reasonable valuations and steady earnings.
Closer to home, we also hold a positive outlook for the Singapore equity market as banks and REITs continue to support the STI’s role as a reliable anchor for income and stability, while other STI constituents are contributing to overall earnings expansion.
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