.jpg)
2 hours ago
1
Article content
Meantime, company executives are sounding remarkably upbeat about the economy this earnings season, even as trade tensions linger and stock valuations look stretched.
Article content
Mentions of “economic slowdown” and synonyms during sales, guidance and earnings calls tracked by Bloomberg are the lowest since 2007. That’s despite the disruption to official US data caused by the government shutdown and the murkier policy outlook it’s led to. And this is playing out as the S&P 500 heads for a third year of high returns, with stocks as expensive as they were at their post-pandemic peak.
Article content
“Government shutdowns have historically had only a muted market impact, so any quick shift in investor sentiment should not come as a surprise,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. “The Federal Reserve’s policy easing, robust corporate profits, and strong AI spending have been the key market drivers, in our view, and they should continue to support the equity rally.”
Article content
Results from megacaps showed that the world’s biggest corporations are still pouring billions into AI infrastructure, cheering investors and bolstering the case for betting on the technology.
Article content
Article content
Still, investors are also beginning to scrutinize the huge sums companies like OpenAI, Meta Platforms Inc. and Microsoft Corp. are spending on AI, leading to heavy volatility in what had been some of the year’s biggest momentum plays.
Article content
Charles Clough, Merrill Lynch & Co.’s chief global investment strategist from 1987 to 1999, said today’s tech behemoths have strong business models that churn out substantial earnings, inoculating them from any economic downturns. Bigger picture, he said, market liquidity is more robust, which can allow further share price gains.
Article content
“People are asking the wrong questions about bubbles,” said Clough, who is still managing money at his firm Clough Capital Partners LP, in an interview. “They think they’re going to repeat the same experience but the world isn’t like before, and especially the capital markets aren’t like that anymore.”
Article content
“Much energy has been spent debating whether hyperscalers’ profit margins are unsustainable,” said Naomi Fink at Amova Asset Management. “The typical response: even if they are, trying to time a correction of any inefficiencies is too costly and thus not worth attempting. After all, even professional investors struggle to call an end to market mispricing.”
Article content
Article content
At the same time, it is also possible that we are asking the wrong question. Perhaps the sustainability of profit margins is overemphasised, while the role of low cost of equity is underappreciated, Fink added.
Article content
“We continue to have a positive outlook for AI and, more broadly, believe we are still closer to the beginning than the end of a robust capex cycle/super-cycle that includes AI and other technology innovations,” said Doug Beath at Wells Fargo Investment Institute.
Article content
Beath said he’s also mindful about not overpaying for the sector and recommend diversifying exposure by adding utilities and industrials for the ancillary data center trend, but with lower valuations.
Article content
At Bank of America Corp., the strategists noted that the market has been so focused on owning companies benefitting from AI investment – from semiconductors to power plants to hyperscalers to certain capital goods names – that the conversation may be missing other opportunities.
Article content
While the earnings reports from big tech provided a lot to like for the AI trade, investors are looking forward to hear from what is the industry’s biggest bellwether — Nvidia. That will be the next key event for markets once the smoke clears on the US shutdown front.
English (US)