Equity rally makes room to broaden returns in healthcare and Swiss stocks

The US stock market has exceeded expectations to date in 2025. We expect performance to now broaden to other sectors and regions. We see opportunities in global healthcare and Swiss stocks as we believe that their fundamentals will improve, and are raising our allocations in response.

At the start of the year, it would have seemed improbable that continuing conflicts in Europe and the Middle East, fiscal recklessness, a slowing US economy and the highest American tariffs in nearly a century could all coexist with a six month, record-setting rally. Yet the S&P 500 has hit a series of highs, most recently more than 6,600 points, after lows in early April. That has taken the year’s gain to more than 12% and the premium attracted by US equities against the rest of the world, based on trailing earnings metrics, has risen to 45% compared with an average of 7% over the last three decades. We believe this suggests that most of the catalysts driving positive performance are priced in.

It now makes sense therefore to adjust our equity exposure to reflect this. At the regional level we have trimmed our US exposure. In March this year we increased our exposure to the technology sector, and the sector has since outperformed all others in the US. Tech firms have weathered fears about their capital spending on AI infrastructure, operating expenditure including AI-related hiring, regulatory challenges and the impact of tariffs on supply chains. Through it all, technology has delivered 12% outperformance compared with the wider MSCI World to date in 2025. However, while we expect earnings growth to continue in the tech sector, many of the positive catalysts fuelling its advances in recent months are now behind us, and high valuations create an additional headwind for investment returns.

Many of the positive catalysts fuelling tech’s advances in recent months are now behind us

The market’s momentum has been impressive, but any increase in margin pressures, or slowdown in earnings growth, would quickly shift the outlook. Projections through 2027 already assume 25% earnings expansion and a forward price-to-earnings ratio of 21 times. That still leaves potential upside, supported by earnings growth and the lack of a US recession. However, compared with other global markets and Swiss equities in particular, we believe that the scope is more limited, making a tactical case for diversification increasingly compelling.

Healthcare’s improving prognosis

Specifically, we now see relatively better potential upside, as well as an opportunity for portfolio diversification, through higher exposure to the global healthcare sector. Healthcare is deeply under-represented in investors’ portfolios, but we think the moment of peak policy uncertainty should now be behind us as markets have had ample time to factor-in the negative news around the sector. Historically, the healthcare sector has tended to rebound from such ‘oversold’ periods. 

At the policy level, the pharmaceutical sector is exempted from Switzerland’s 39% US import tariff, although it still faces the potential threat of duties that could be imposed under national security provisions of the US’s Trade Expansion Act, or so-called Section 232. President Trump had threatened tariffs on pharmaceutical imports as high as 250%. In August, the US agreed with the European Union to impose a 15% duty cap, that will not be applied until Section 232 is published. This, we think, may offer a template for an eventual tariff on Swiss pharmaceuticals.

With these ‘worst-case’ factors known and priced into healthcare names, the outlook for the sector started to improve

Investors have also taken into account the Trump administration’s ambition to reshape the US healthcare model, including drug regulation, manufacturing and pricing. The US president set a 29 September deadline for pharmaceutical companies to cut prices and launch a ‘direct-to-consumer’ channel, bypassing many of the intermediaries that account for a large proportion of healthcare spending in the US.

With these ‘worst-case’ factors known and priced into healthcare names, the outlook for the sector started to improve with more positive corporate guidance during second-quarter earnings. Taking all of these factors into account helps to increase the visibility for the sector, which, until now, has negatively impacted stocks.

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Reflecting this preference, we are raising exposure to Swiss stocks which offer higher potential for returns than US equities, including from earnings per share growth. We have also slightly reduced our positions in US technology and communication services, which have both driven US equity returns over the last six months. Competition in the tech sector has intensified and the capital investment cycle into infrastructure continued to grow. 

We raise exposure to Swiss stocks which offer higher potential for returns than US equities, including from EPS growth

This adjustment to our US equity exposure is not a reflection of our outlook for the US economy. While the American job market is weakening, reflecting lower immigration and slower company hiring, unemployment is only rising gradually. That may eventually slow consumption too but, for now, retail spending remains positive and corporate earnings continue to expand, boosted by a still-weak US dollar. As a result, we do not expect a recession, and the Federal Reserve’s resumption of its interest rate cutting cycle clearly indicates that its priority has become to support the job market.

In our global equity strategy we retain an overweight allocation. In addition to the healthcare sector, we also favour utilities, where there is a step-change in demand for power, thanks to the requirements of AI and data centres. We also keep our exposure to emerging markets overweight, and remain neutral on developed market stocks.