Fed Rate Hike Expectations Rekindled! BNP Paribas Wealth Management Forecasts Possible 'One-Step' Increase to 4% in December

Global equity markets have recently seen a significantly accelerated rotation, with leadership shifting from large-cap tech stocks to value and cyclical sectors. BNP Paribas Wealth Management maintains a neutral stance on global equities and advises investors to enhance diversified allocations. Amid sticky U.S. inflation and slowing economic momentum, the firm has revised its earlier view that the Federal Reserve would hold rates steady this year, now anticipating a single rate hike in December that could bring the target rate to 4.0%. It has simultaneously upgraded Japanese equities to overweight, and European, South Asian, and Southeast Asian markets to neutral, emphasizing the importance of portfolio diversification to navigate market volatility in the second half.

BNP Paribas analyzes that improving risk appetite has driven rebounds in previously lagging markets. While AI remains a long-term investment theme, large-cap tech stocks are showing signs of fatigue, with capital clearly flowing into industrial, healthcare, mining, and banking sectors that benefit from AI infrastructure. Compared to the 'Magnificent Seven' tech giants, value stocks and U.S. small-cap equities have recently outperformed significantly, with the latter gaining approximately 32% since last November. Therefore, the firm recommends investors consider taking partial profits from tech positions and reallocating toward Japanese and European bank stocks and value-oriented sectors to diversify portfolio risk.

In terms of regional and sector allocation, European banks are viewed favorably due to attractive valuations, increasing M&A opportunities, and AI-driven operational efficiency improvements, offering strong long-term investment potential. Financials are also favored in the U.S. market. Additionally, global healthcare, industrial, and mining sectors are key preferred areas. These industries, which benefit from sustained demand for AI infrastructure, are expected to demonstrate greater resilience and growth potential as market capital seeks safe havens. Investors are advised to moderately increase exposure to these sectors.

For investors with higher risk tolerance seeking potential returns, BNP Paribas highlights the contrarian investment value in gold mining stocks. Despite recent pullbacks in gold prices and corrections in the gold miners index, large gold producers continue to show strong free cash flow yields. The forecast for gold prices to reach $5,500 per ounce over the next 12 months remains unchanged, and the earnings leverage of gold miners to rising gold prices has not yet been fully reflected in stock valuations, making them a noteworthy investment opportunity.

Finally, BNP Paribas emphasizes that market volatility may intensify in the second half, urging investors to continuously diversify risk across regions, sectors, and asset classes. Moderately increasing allocations to Japanese and European equities and value stocks, while maintaining exposure to the long-term industrial transformation driven by AI, will be key to maintaining portfolio stability and achieving sustainable returns in a volatile market environment. Avoiding excessive concentration in any single market or large-cap tech stocks is crucial.