Look to Life Sciences

The idea: Life sciences tools companies — which may make anything from mass spectrometers to antibodies to lab management software — have underperformed the S&P 500 and the pharmaceutical sector this year, weighed down by US policy risks. Labs are reducing life sciences expenditures as they pursue greater cost efficiency to mitigate cuts, and tariffs have raised raw materials costs and limited customer budgets. The industry is also seeing a slowdown in China orders as local governments slash hospital and research spending, reducing demand for imported tools. However, valuations for these stocks have fallen well below historical averages, potentially already pricing in tougher times ahead. Given the essential role of scientific research in human advancement, funding cuts may be short-lived. Patience is key.

The strategy: The Trump administration has proposed capping National Institutes of Health indirect cost reimbursement at 15%, down from the historical 28% to 29%. That’s the worst case scenario. If enacted, this could reduce the NIH budget by $4 billion annually, weakening the backbone of US biomedical research. The NIH is a global leader, having supported research behind most FDA-approved new molecular entities.

Investors can look ahead to a restoration of funding in critical areas of scientific research, likely next year. Preclinical R&D will continue, and biopharmaceutical companies are expected to refocus on early-stage, high-potential assets, ensuring continued demand for life sciences tools despite broader funding challenges. Tariffs may also be less impactful than expected. Many life science companies have plans to mitigate tariff exposure through supply chain relocations, dual sourcing, reshoring, input substitutions and/or inventory buffering. These strategies dilute the long-term effect of tariffs.

As well, investors can look ahead to leading life sciences tools companies maintaining pricing power and offsetting costs via surcharges in inflationary periods. Their history of strategic consolidation supports long-term stability.

The big picture: Life sciences tools providers are well-positioned to benefit from transformative health-care trends. These industry trends matter to voters and investors alike. Public health-care systems in countries with growing elderly populations need medical innovations to offset rapidly rising medical costs. This requires funding in areas such as biologic drugs, gene and cell therapies, personalized medicine and semiconductor innovation via materials science.

Value Rotations

The idea: Tech is back leading the global equity market recovery, with the US outperforming many developed equity markets. However, on most of our metrics, this tech outperformance may have run its course, suggesting scope for some new investment ideas to emerge. If inflation is set to trough over the coming few months, investors may start to position for that outcome and rotate out of tech and “growth” stocks and back toward more “value” plays. As well, an investment theme we continue to emphasize is European defense spending.

The strategy: A rotation back toward more value plays can be executed directly in the growth and value “factor” indexes, but investors could also sell holdings in US tech hardware and software stocks and reinvest the funds into less well-liked areas such as insurance, or even the over-sold health-care sector. There may be structural negatives on health care, but on a technical view it is very oversold. Normally, these kinds of technical signals do better signaling “buys” than “sells,” but it is a short-term trade — as in the next three months rather than the next three years.

We look at these sectors from a macro/momentum perspective and would be looking at broad sector ETFs rather than focusing on, say, biotechs or pharma per se, or the life- or non-life insurance sectors. But based on our tactical indicators, an area such as medical equipment is oversold, and therefore has the potential to bounce. Between the life and non-life insurance sectors, the non-life sector has comfortably outperformed the life sector and we would expect to see a bit of a catch-up.

The push for increased European defense spending presents another opportunity. Most European NATO members agreed to increase their defense spending toward 5% of GDP from less than 2% of GDP currently. Even though we have already seen good gains in some of the leading players, there looks to be plenty more scope for further gains.

The big picture: The April hiatus in financial markets seems a long way behind us. Even war in the Middle East only tempered the upward trend, and once the conflict ended, with the potential danger to global oil flows reduced, we saw the good times roll once more. The main driver for enthusiasm in equity markets is the combination of policy rates looking set to fall further, especially if President Trump gets his way, as inflation measures moderate, alongside weakening in the US dollar. A weaker dollar tends to be positive for global liquidity and global growth. The bad news is that a weaker dollar might also see US inflation reaccelerate in the latter part of the year, even without any further boost from US tariffs.

Ignore Oil, Stay Long US Stocks

The idea: Energy markets have a long history of scaring the stock market. While that dynamic played out briefly in June, the effect was modest and short-lived. In my view, investors should continue to stay long US equities, despite continued uncertainty across energy and geopolitics.

The strategy: Why did investors look past the recent spike in oil prices? While a 35% spike in oil is not trivial, it is modest relative to previous and longer-lasting energy shocks. It is also worth highlighting that even at the peak of nearly $75 a barrel, crude prices were still below their January peak. Even when oil does spike, the relationship between stocks and oil is not what you’d expect. In recent years there has been a modest positive correlation between oil and US stocks, based on data from Bloomberg. The relationship has shifted as US domestic production has surged and consumer wallet share has become less energy-intensive. In 1990, gasoline and energy goods accounted for roughly 6% of consumer spending, according to the Bureau of Economic Analysis. Today, it is around 4%.

Within the US we continue to favor AI-related and software companies, industrial stocks tied to reshoring and select consumer discretionary companies, specifically those geared to services and experiences.

The big picture: To be clear, US equities are not bulletproof. Valuations are elevated and uncertainty is high. That said, the economy is resilient on the back of solid consumption, a robust labor market and continued emphasis on AI-driven capital spending. Earnings can continue to climb, providing more upside. In other words, the stock market can withstand the occasional shock.

‘Value Growth’ Plays

The idea: We’re still thinking about where the secular growth trends will be in tech but balancing that with a focus on growth companies that are probably undervalued because they’re more cyclically oriented. For example, there are several software players with attractive valuations that may be poised to see greater growth uncoil thanks to the data they aggregate, which is valuable in applying artificial intelligence. We also want exposure to what we see as the shifting focus of the government and its policies, which we see as supporting companies in the aerospace and defense industry, and in moves toward deregulation, which hasn’t really happened yet but which we think will have legs.

The strategy: Some smaller aerospace and defense companies could benefit from allocations in the One Big Beautiful Bill Act and the shift in foreign policy to have other countries contribute their part to being global watchdogs. We’re looking beyond the most obvious players like Boeing, GE Aerospace and Raytheon and at more niche players that might be a better way to get exposure right now, given the run the larger players have already had this year. In aerospace and defense, technology is part of the story, with things like drone makers and perhaps the cybersecurity-type aspect, but also shipbuilding, which hasn’t been a focus for a long time. You could also look at more industrial companies.

In financials, we think regional banks will benefit more than the biggest banks from a deregulatory focus. Even after the recent three-month run-up in bank stocks, regionals look like better value, with more tailwinds from deregulation and potential M&A activity.

The big picture: I used to call — in a nice way — Fed chairmen the market’s DJs, where whatever they said moved markets and got things going. That balance of power has shifted, like so many things, to the executive branch of our government and listening to Treasury Secretary Scott Bessentt is important now. I was at a conference earlier this year in a small group with Bessent, and he said that everyone has to remember that we are this three-legged stool, and that there are other pieces to our administration than tariffs. I think we’ll start seeing a shift to things that are more pro- the US economy.