Bullish despite AI bubble fears? Why we remain risk-on, for now

Against the odds, 2025 has seen truly mind-blowing performance across equity and credit markets. This has led to much discussion about whether the high valuations assigned to AI stocks is merited. Does the bullishness simply mirror the technology’s rapid integration into our daily lives? Or are markets reaching dangerous heights? Our Portfolio Managers across asset classes interrogated this topic, and decided – for now – to maintain their risk-on stances. Here’s why.

Read also: Market exuberance, with logic

Will markets stay bullish?

It's hard to ignore the strength of market sentiment at the moment. For the first time since the middle of 2024, all asset classes are trending higher, including bonds. But can this bullishness persist? The current cycle owes much to the buying frenzy from retail investors, who are significantly concentrated in their exposures. Yet, when looking at market positioning, the long developed markets (DM) equities trade is not overcrowded globally. Moreover, institutional investors globally are more defensively positioned (see Figure 1), which could help cushion any retail-led market setbacks.

FIG 1. DM equity positioning¹

Mind the valuation

Naturally, today's positive market sentiment means some segments appear expensive or even overvalued. Globally, multiples now stand at 10% (for DM equities) to 20% (for emerging market (EM) equities). These levels are higher than a year ago, despite increased geopolitical tensions and market uncertainties. Our analysis shows that today's trendiest assets, particularly US equities, offer limited risk-reward potential (see Figure 2). However, other areas – notably EM bonds, European equities and Asian equities – still offer attractive opportunities.

Making this distinction is crucial. Otherwise, there is a temptation to dismiss all current valuations as irrational. In addition, strong corporate earnings are evident across asset classes that aren't universally overbought, meaning that exceptional earnings often justifies premiums that initially appear expensive.

FIG 2. Yields relative to cash rates across asset classes²

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All Roads

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AI rise or AI bubble?

The tech frenzy has significantly transformed global indices. AI stocks, which make up approximately 5% of the names in the MSCI World Index, have seen the value of their Index representation shift from around 5% to nearly 30%.³ Is this trend sustainable?

Unlike the 2000 dotcom bubble, today's AI complex consistently beats earnings expectations and appears to be attracting faster adoption rates. While AI capital expenditure might appear concerning, a substantial portion of the sector remains cash-rich and finances investments internally, which differs from the dot.com example. Currently, technology equipment investment contributes approximately 30-50 basis points to GDP growth, acting as a positive economic force.3 Moreover, these investments could serve applications beyond AI itself, marking another significant difference from the prior internet bubble.

What signs of weakness should investors monitor? We highlight three key indicators:

1. Double ordering, or companies placing orders with multiple suppliers due to component shortage concerns despite unchanged demand
2. The end of earnings upgrades with sell-side analysts raising multiples to justify further price appreciation
3. Massive capacity expansion late in the cycle.

These warning signs are not currently evident in today's market. In particular, we believe Chinese tech companies remain attractive from a valuation perspective and carry relatively little debt, while Asian tech is generally focused on real-world applications and the rapid realisation of positive cash flows.

Our positioning across asset classes

At the time of writing, our investment teams remain content to maintain balanced risk exposures in the belief that this rally could have further upside potential, with market declines representing opportunities to add to positions.

Multi asset. The All Roads team remains neutral, with market exposure rising to around 155%, with its allocation remaining well balanced between protection assets at 57% and 43% for cyclical (rebased to 100%).

Fixed income. Our Global Fixed Income team is neutrally positioned, with an underweight to sovereigns, which favours Treasury Inflation-Protected Securities (TIPS) over nominal US Treasuries, and an overweight to EM hard-currency debt. Within credit, exposure to investment grade and high yield (HY) is neutral, with a defensive and selective tilt. Our Asia Fixed Income team favours defensive HY and is overweight India, commodities, insurance and emerging market HY sovereigns.

Convertible bonds. The team is positive on the US, China and Japan, and neutral on Europe. They are constructive on equities globally, focusing on key themes such as AI – where positioning has shifted to software. US exposure now focuses on onshoring and other strategic activities. In Europe, exporters, industrials and companies linked to electrification are favoured.

Equities. Our Global Equities team is overweight EM at the expense of the US. In terms of sectors, it remains overweight technology, media and telecoms, and has raised its allocation to European luxury stocks. Our Swiss Equities team is overweight communication services, information technology and industrials, and underweight consumer discretionary, materials, real estate and utilities. The Asia Equities team remains overweight China and Hong Kong, and underweight India, favouring IT and consumer discretionary stocks.