T. Rowe Price's Global Investment Solutions head and portfolio manager Thomas Poullaouec, along with the firm's Asia investment committee, observe that global economic growth continues to demonstrate resilience despite geopolitical disruptions, elevated energy costs, and tighter financial conditions. This durability reduces the near-term risk of a sharp deterioration in corporate earnings.

Importantly, the momentum behind earnings growth is broadening beyond mega-cap technology firms, with a growing number of companies reporting improved order books, expanding profit margins, and upward revisions to their guidance. Supported by this macroeconomic strength, artificial intelligence-related investment is now extending into areas such as power generation, data centers, industrial equipment, automation, and network connectivity. As fiscal support gradually fades, these investments are poised to catalyze a more widespread private-sector capital expenditure cycle.

Falling inflation provides another tailwind for markets. With price pressures easing, the likelihood of further rate hikes by the Federal Reserve has diminished, creating a more favorable backdrop for equities. Meanwhile, long-duration bonds continue to face headwinds from substantial supply, persistent fiscal deficits, and resilient nominal growth. Given solid corporate balance sheets, accessible capital markets, and investor positioning that is not excessively optimistic, equities offer a better balance between upside potential and relative risk.

From a global policy perspective, monetary cycles are becoming increasingly divergent, as central banks weigh distinct growth and inflation trajectories, fiscal stances, and measures introduced to cushion energy price shocks. In the United States, cooling inflation supports the Fed holding rates steady, but resilient growth, ongoing AI-driven investment, and supportive fiscal policy suggest the central bank may not pivot to easing quickly. Consequently, the Fed must balance upside and downside risks, and uncertainty over the policy path could keep rate volatility elevated.

Policy directions in other major markets are more varied. The European Central Bank may again face pressure to tighten, as higher energy costs, Germany's expansionary fiscal measures, and robust growth in some eurozone economies like Spain and Italy complicate the picture. In Australia and the UK, slowing growth could offset lingering inflationary pressures, potentially leading central banks to maintain rates unchanged. In Japan, short-term inflation relief from government subsidies may mask underlying price pressures, leaving the Bank of Japan with a potential need to hike rates.

For investors, diverging inflation trends and local growth differentials are likely to drive further dispersion in policy rates, exchange rates, and regional market performance. At the asset allocation level, T. Rowe Price maintains an overall risk-on stance, continuing to overweight equities. Within equity portfolios, the firm employs a diversified approach, favoring US large-cap stocks and Asian equities to capture AI-related opportunities. It also retains an overweight position in real asset-linked stocks as a hedge against above-target inflation.

In fixed income, the firm has increased its allocation to long-dated US Treasuries, based on the view that the Fed is more likely to hold rates steady as inflation gradually stabilizes. However, given the lingering risk of an inflation surprise, the overall duration positioning remains underweight. Cash remains slightly underweight, viewed primarily as a funding source for adding exposure to other asset classes.