1.1 AI euphoria has won over war-related worries on equity market since mid-May

If one had to settle on a single figure that best describes the month of May, it might be 169%. That is how much South Korean semiconductor exports grew compared to the same month last year. This contributed to South Korea running an average trade surplus of over 25 billion won over the past three months, compared with an average of four billion won in the previous ten years. It helped push the local stock index, the Kospi, up by 28.5% in May (and 102% since the beginning of the year), placing it comfortably at the top of global and sector indices. Neither the Nasdaq (10.5%) nor the U.S.-heavy Philadelphia Semiconductor Index (SOX) at 22.2% were able to keep up. It fits the picture that both chip heavyweights, Samsung Electronics and Hynix, managed in May to lift their market capitalizations above one trillion dollars. After all, no sector has benefited more this year from the unabated AI boom than semiconductors. These two companies now make up more than half of Kospi’s market capitalization.

In Europe, the pace has been significantly more subdued. The Stoxx Europe 600 managed a gain of just 3.2%. Still, it was a gain, and one that would likely have surprised most investors a few months ago had they been told at the beginning of April that the Strait of Hormuz would still be largely closed to shipping in May. This apparent lack of market concern about the Iran war could be explained by a saturation of news (or rather noise) from the White House. It might also reflect the fact that the ceasefire - though not consistently upheld - has already lasted longer than previous periods of hostility. Or simply that the feared major disruptions along supply chains affected by the closure have so far failed to materialize. Corporate earnings for the first quarter, as well as sentiment indicators such as purchasing managers’ indices, also showed little that was dramatically negative. One might begin to wonder whether oil company executives are starting to worry about how easily the global economy has so far absorbed this sudden reduction in oil supply. Nevertheless, investors should not head into the summer without concern. For one, it remains difficult to imagine how a lasting peace in the region could be achieved given the sharply diverging interests of Iran, Israel, and the United States. For another, the continued drawdown of commercial and strategic oil inventories in May likely contributed to Brent crude ending the month with a double-digit decline below 100 dollars per barrel.

While many companies can cope well with these oil prices, the less affluent segment of the U.S. population likely cannot. This is reflected, among other things, in consumer confidence as measured by the University of Michigan, which has fallen to its lowest level since the data series began in 1952. By contrast, the sentiment index published by the Conference Board is not at historical lows, which may be due to its stronger focus on job security rather than cost of living, as in the Michigan index, where concerns about inflation are more prominently reflected. At least the month ends with markedly lower oil prices and, above all, lower government bond yields than in mid-May, when some 10- and 30-year yields around the globe reached long-term highs: 30-year U.S. Treasuries at 5.18% (2007), 10-year German Bunds at 3.19% (2011), 10-year Japanese JGBs at 2.78% (1997), and not least 10-year UK gilts at 5.17%, following renewed speculation about how long the current prime minister will remain in office. Yet all of this may currently register with investors merely as background noise amid the AI euphoria. That enthusiasm will likely also be needed to successfully place the upcoming record IPOs (SpaceX; Anthropic; OpenAI) in the market  

As this is the quarterly edition of our Investment Traffic Lights, we will concentrate on setting out our new 12-month forecasts, while also providing our latest short-term changes in asset-class views.

Markets are characterized by nervousness about short‑term inflation pressures and economic growth, with the recent oil-price shock raising prices and weighing increasingly on consumption and investment. We expect this mix to keep the macro backdrop challenging. Investors are also reassessing interest-rate risks. We see the environment as being bifurcated: a powerful AI‑driven impulse to growth on the one hand, and negative forces from inflation and geopolitics on the other. And how the current difficult geopolitical situation will unfold, remains highly uncertain.

The AI investment cycle remains the structural tailwind. It is supporting some sectors and regions disproportionately and offsetting part of the broader macro uncertainty. At the same time, other markets remain far more exposed to traditional cyclical and interest-rate dynamics, so we expect dispersion across regions and segments to remain in place.

The growth outlook is not better than moderate.  We don’t expect a major cyclical upswing in the coming 18 months. We project U.S. gross-domestic-product (GDP) growth at 2% in both 2026 and 2027. We forecast global growth to accelerate slightly from 3.1% to 3.3%, driven by Japan and Europe, two regions that will both be emerging from subdued growth in 2026: 0.9% in the Eurozone and 0.7% in Japan. Monetary policy is likely to be slightly restrictive for the remainder of this year given heightened inflation. This means the U.S. Federal Reserve (the Fed) is likely to be on hold while the European Central Bank (ECB) may hike in June, and perhaps again later in the year.

Equity markets are expected to be supported by further earnings growth and not by an expansion of multiples. Early summer might turn out to be crunch time for investors as mega IPOs from the likes of SpaceX, Anthropic and OpenAI, as well as capital increases (such as Alphabet’s USD 80bn capital raising plans) and high debt issuance are likely testing investors’ patience, optimism and pockets.

Meanwhile, though it seems to have moved markets less in recent weeks, the Iran conflict remains key to the macro environment, with both growth and inflation highly dependent on its implications and duration. Overall, we expect a resilient but increasingly differentiated market environment through mid‑2027, supported by structural investment in AI yet constrained by higher energy costs and consumer fatigue among lower income households.

2.1 Fixed Income

We expect global interest-rate developments to continue to be shaped by the tension between elevated inflationary pressure and weakening growth momentum. While inflation risks are likely to dominate in the short term, we assume that growth risks will increasingly come into focus over time and open up room for monetary-policy adjustments.

We see monetary policy as being in transition. In the Eurozone we expect a moderately more restrictive stance in the short term, while we consider a renewed easing bias likely to emerge over the medium term. In the United States, we think that the current restrictive stance will prove sufficient and that rate hikes will not materialize; next year, we expect room for rate cuts to open up.

_{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/29/26}

Government Bonds

As the impact of tariffs has started to fade, pressure is now stemming primarily from high oil prices, with upside risks elevated as long as the Iran conflict continues. While AI-related disinflationary effects may materialize, they are likely to do so only gradually, as automation typically reduces relative prices over time. At the same time, we observe a flight to quality that appears to be driven by idiosyncratic and geopolitical factors. Growth and employment are expected to slow in the second half of the year.

Against this backdrop of manageable inflation and only limited second-round effects, we think the Fed is likely to prioritize supporting growth, which is projected to decelerate towards potential while recession risks should remain contained. We therefore expect a lower yield curve, with two Fed rate cuts bringing the policy rate to 3.00–3.25% by June 2027. Tactically, we moved from Neutral to Positive on 10-year Treasuries in mid-May.

In Europe, inflation risks remain tilted to the upside but are not expected to trigger a full tightening cycle. We expect two additional rate hikes by the ECB in the near term, which should help anchor inflation expectations. Thereafter, policy is likely to shift gradually towards a more accommodative stance as inflation moves closer to target and growth remains subdued. Against this backdrop we expect Bund yields to decline across the curve but have moved from Positive to Neutral for both the 10-year and the 30-year maturities as we believe that investors are still worried about inflation risks.

The outlook for UK Gilts is constructive as slowing growth, a weakening labor market and a “wait-and-see” Bank of England (BoE) stance could help yields ease from currently elevated levels. Japanese JGB yields are expected to rise gradually as the Bank of Japan (BOJ) continues cautious normalization. We prefer the longer end of the curve.

Corporate Bonds

In the U.S., we expect modestly wider spreads compared to current levels, capped, however, by a resilient growth backdrop and favorable technicals. However, there are a number of risks, ranging from potential weakness in consumption, elevated bond issuance, policy uncertainty to possible disruption related to AI developments. In the investment grade (IG) segment, the outlook remains constructive, with positive technicals likely to hold unless a decline in rates or increased M&A-related supply exerts upward pressure. In high yield (HY), as long as markets can absorb higher energy prices and GDP growth remains solid, we do not expect material spread decompression.

In Europe, we expect investment-grade spreads to remain stable to slightly tighter, supported by solid fundamentals, strong technical factors and sustained investor demand. In the high-yield segment, we also forecast spreads to remain broadly stable at tight levels, although downside risks have increased given geopolitical uncertainty and elevated energy prices. From a shorter-term, tactical perspective we upgraded EUR IG in late May from Neutral to Positive as we believe investors have moved on from Iran-related risks and are concentrating on attractive all-in yields again.

Credit investors show little fear about the war – demand remains robust _{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/29/26}

Emerging Markets

We expect spreads for emerging market (EM) sovereign bonds to move sideways by June 2027. Energy prices and U.S. dollar developments remain key influencing factors. At current levels, valuations leave little room for error and provide virtually no compensation for elevated geopolitical risks in our view. The combination of a broadly balanced fundamental backdrop and increasingly tight valuations supports a Neutral view.

For Asia credit we expect slightly increasing spreads, with demand continuing to be driven by structural capital flows and regional growth dynamics. At the same time, global risk appetite remains key, and the segment is vulnerable to external shocks. Asian credit continues to trade at very tight spreads historically despite the concerns about geopolitics and high energy prices. But with an all-in yield above 5% we think it remains attractive for investors. Regional high saving rates should continue to provide strong technical support for the asset class. We have a slight preference for IG over HY given the potential volatility ahead.

Currencies

We see potential for EUR/USD to reach 1.22 by June 2027. In the short term, we expect sideways movement driven by opposing impacts from energy prices and terms-of-trade developments. Over the medium term, however, we expect structural factors, particularly fiscal developments and shifting capital flows, to lead to a weakening of the U.S. dollar.

Our USD/JPY outlook points to a stronger yen over the medium term. At present, the yen is significantly undervalued in our view, and we expect capital repatriation by Japanese investors. The gradual normalization of BOJ policy as inflation approaches its target is another positive, although short-term risks from elevated energy prices and renewed carry trades may temporarily weigh on the currency. We see potential for a USD/JPY level of 145 by mid-2027.

2.2 Equities

We expect global equity-market performance to continue to be driven largely by the dynamics of the AI sector. We think the continuing increase in investment in computing capacity and infrastructure supports above-average earnings growth in some sectors. At the same time, we see increasing differentiation between regions and sectors. While AI-exposed markets are benefiting from structural growth, other areas remain more dependent on macroeconomic factors.

We assume that valuation levels in the technology sector will continue to be supported by strong earnings growth rates, even as the debate about over-investment and potential excesses gets louder. Overall, we expect a positive environment for global equity markets but one in which structural themes may carry more weight than macroeconomic factors. For our forecasts we assume that: a) The Strait of Hormuz will open at least partially within the next two months.  b) No recession on the horizon for the next three years in developed markets. c) 10-year U.S. Treasuries below 5%, two Fed cuts, two ECB hikes, a 50-basis-point (bps) BOJ rate increase and d) no further expansion in multiples in the U.S., making the market more earnings-driven.

_{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/29/26}

U.S. Market

We see potential for the S&P 500 to reach 8,200 by June 2027. The U.S. equity market continues to be dominated by the AI investment cycle which is fueling both earnings growth and capital allocation. Strong demand for computing capacity and increasing monetization of AI is supporting valuations. At the same time there are risks in the form of potential over-investment and a possible reassessment of growth assumptions.

European Market

We think the Stoxx Europe 600 could reach 650 by June 2027. The European equity market remains shaped by a combination of moderate growth, higher inflation risks and structural challenges, resulting in lower momentum compared to the United States. At the same time, selective sectors offer opportunities in our view, particularly where structural themes such as the energy transition or selected industrial segments are in play.

German Market

We see potential for the DAX40 to reach 26,300 by June 2027. The German market is benefiting from strong fiscal support but remains vulnerable to macroeconomic fluctuations due to its high cyclicality and energy dependence.

Emerging Markets

We think the MSCI EM Index could reach 1,870 by June 2027. Performance in emerging markets remains uneven. Some Asian countries are benefiting from structural growth, but energy dependence and exchange-rate dynamics are weighing on other regions. Relative attractiveness remains dependent on global risk appetite and U.S.-dollar developments. From a tactical perspective, we have upgraded EMs to Positive, as strong AI-driven demand and limited supply are generating high pricing power in EM semiconductors. Their high index weight supports the upgrade.

Japan

We see potential for the MSCI Japan Index to reach 2,660 by June 2027. The Japanese market is benefiting from structural reforms and a gradual normalization of monetary policy but remains sensitive to shifts in global capital flows and currency movements.

Sectors

We made two tactical sectoral changes in mid-May. We downgraded Healthcare as earnings growth has disappointed so far this year and political risks may increase ahead of elections, which is negative in an AI-driven market. We also downgraded the Real Estate sector due to high mortgage rates and a weak outlook for earnings growth. At the same time, we have upgraded Utilities to Positive as AI data centers require significant electricity demand, supporting earnings growth.

2.3 Alternatives

Real Estate

We see short-term consolidation in the non-listed real estate sector following strong previous performance. While the United States continues to show robust dynamics, we expect more moderate developments in Europe and Asia. Rising yields are a negative in the short term. In our opinion, structural factors such as limited supply and delayed construction activity will provide support over the medium term.

Infrastructure

We expect infrastructure investments to continue to benefit from structural trends such as energy transition and electrification. At the same time, developments within the segment remain differentiated, reflecting particularly the degree of sensitivity to interest rate and regulatory moves. In the event of higher inflation, Infrastructure should benefit given its inflation passthrough traits and necessity-based assets.

Gold

We see potential for Gold to reach a price of USD 5,400 per ounce by June 2027. We see fundamental support for Gold stemming from the interplay of monetary policy, currency developments and structural demand. Against the backdrop of expected monetary easing in the United States and a resulting weakening of the U.S. dollar, the environment for non-yielding assets remains broadly constructive. In addition, demand is supported by central banks. Purchases were estimated at around 240 tonnes in the first quarter, corresponding to annualized demand of approximately 1,000 tonnes, and remaining at the level of previous years. This structural demand has a stabilizing effect and increases resilience to short-term macroeconomic fluctuations. Moreover, Gold remains closely linked to global liquidity and money-supply trends. The combination of ongoing uncertainty about the future path of inflation, geopolitical risks and prospectively easing financing conditions supports Gold’s role as a potential hedge. Overall, we believe that the combination of monetary easing, structural demand and a weaker U.S. dollar should underpin price levels and allow for further upside potential, in line with our forecast.

Oil

We expect Brent crude oil to drop to a price of USD 82 per barrel by June 2027. We assume that short-term price developments will continue to be driven primarily by geopolitical factors. Our forecast assumes a gradual de-escalation of the Iran conflict, including a normalization of transport routes and, in particular, the reopening of the Strait of Hormuz by the end of September. On the supply and demand side, we initially expect a deficit, which should later be more than offset by rising supply. Additional production impulses are expected mainly from OPEC as well as individual producers such as the United Arab Emirates, complemented by potential output increases in the United States. We estimate that oversupply could reach around 2.0 to 2.5 million barrels per day by mid-2027. It should exert a dampening effect on prices.

_{Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/29/26}