Macro trends, monetary policy and US market opportunities

In a recent conversation, Fiona Harris, Global Investment Specialist at J.P. Morgan Asset Management, shared her views on the forces shaping markets today, from artificial intelligence and earnings growth to inflation, interest rates and the importance of diversification.

Listen to the full podcast episode, watch on YouTube or read the article below for the full discussion.

Q: The headlines this year have been dominated by conflict in the Middle East and rising oil prices. How significant is this for investors?

The market has certainly been focused on developments in the Middle East, particularly the impact on energy markets. While oil prices have risen significantly, they have not reached the extreme levels many feared at the outset of the conflict.

The bigger concern is what higher oil prices mean for inflation. Rising energy costs feed through to both consumers and businesses, putting pressure on spending and profitability. If inflation remains elevated for longer, central banks may need to keep interest rates higher, which has implications for markets, particularly growth-oriented sectors.

That said, despite the uncertainty, the underlying economic backdrop remains healthy. The US economy continues to grow, corporate earnings remain robust, and innovation linked to artificial intelligence continues to drive investment and productivity.

Q: The US economy has remained remarkably resilient. What is supporting markets today?

At the end of the day, markets are driven by earnings growth, and that’s where the story remains compelling.

Investors sometimes forget that the long-term average growth rate for S&P 500 earnings is around 7% per year. Today, many companies are delivering earnings growth of more than 20%, which is extraordinary by historical standards.

What’s particularly encouraging is that earnings growth is beginning to broaden beyond the largest technology companies. While AI-related businesses continue to play a major role, we are also seeing strong earnings growth emerge in sectors such as financials and industrials.

The market’s gains this year have been underpinned by genuine earnings strength rather than simply rising valuations, which is generally a healthier foundation for long-term returns.

Q: AI has dominated investment conversations for several years. How do you view the opportunity now?

Artificial intelligence remains one of the most significant structural trends in markets today.

Like previous technological revolutions, AI is gradually becoming embedded in everyday life and business operations. It is already improving productivity and efficiency across industries, often in ways people don’t immediately notice.

However, not every company exposed to AI will be a winner. We’ve seen investors move through different phases of the AI investment cycle, from the large technology platforms and semiconductor manufacturers to memory chip producers and infrastructure providers.

One area investors should pay attention to is the significant level of spending required to support AI development. Some of the largest technology companies are increasing capital expenditure at a much faster pace than previously expected, and markets are beginning to ask tougher questions about how those investments are being funded and when the returns will emerge.

For that reason, Fiona believes investors need to be selective.

Q: Are opportunities emerging outside technology?

Absolutely.

Investors should be careful about assuming they are diversified simply because they hold multiple funds or sectors. Many portfolios remain heavily exposed to the same underlying AI theme.

More attractive opportunities are beginning to emerge in areas that have been overlooked for several years.

Healthcare is one example. Outside a handful of high-profile weight-loss drug companies, many quality healthcare businesses have struggled to attract investor attention despite improving fundamentals.

Industrials also present opportunities, particularly companies benefiting from infrastructure investment, electrification and increasing power demand driven by data centres and AI development.

“We think there are some really attractive opportunities beyond the obvious AI names. The key is balancing opportunity with diversification and risk management.”

Q: How could interest rates affect markets over the next year?

Inflation remains one of the most important variables for investors to monitor.

While there has been much discussion around the appointment of new Federal Reserve Chair Kevin Warsh, Fiona believes markets should focus less on personalities and more on the data itself.

Current market expectations suggest interest rates could be higher 12 months from now than they are today, depending on how inflation evolves. Energy prices will play a critical role in shaping that outlook.

“The market doesn’t like surprises. What’s most important is not necessarily what we think will happen, but what the market is pricing in and how those expectations evolve.”

Q: What about the upcoming US midterm elections?

Despite being less than 100 days away, the midterms are not currently a major focus for markets.

While election outcomes may shift the balance between Democrats and Republicans in Congress, expectations largely remain centred on a divided government.

Historically, markets tend to be more influenced by economic fundamentals and corporate earnings than political events. Fiona expects the midterms to provide insight into future political sentiment, but not necessarily become a primary driver of market volatility.

As she puts it: “Profits over politics.”

Q: With markets near record highs, what advice would you give investors considering putting new capital to work?

Focus on the long term.

Investors can always find reasons to wait. There will always be concerns around valuations, inflation, elections, geopolitical risk or economic growth. Yet history consistently shows that long-term investors benefit more from time in the market than attempting to time the market.

She notes that even investors who entered the market immediately before major downturns have gone on to generate positive returns over time, provided they remained invested.

The key is to combine that long-term commitment with sound portfolio construction. Diversification, quality investments and disciplined risk management remain just as important as identifying growth opportunities.

The key takeout

While geopolitical tensions, inflation concerns and interest rate uncertainty are creating periods of volatility, Fiona believes the foundations supporting US equities remain intact. Strong earnings growth, ongoing innovation and expanding opportunities beyond the largest technology companies continue to support the long-term investment case.

For investors, the challenge is not predicting every short-term twist and turn. It is remaining focused on long-term goals, maintaining diversification and ensuring portfolios are positioned to benefit from the opportunities that lie ahead.

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