The AI Ecosystem: An Unfailing Support for Equity Markets?
The situation in the Strait of Hormuz remains frozen, with traffic almost at a standstill, and yet equity markets remain solid. The reason is simple and comes down to two letters: AI. Earnings season has indeed confirmed the very strong momentum of the sector and, above all, the exceptional profitability of semiconductor and RAM manufacturers. This is a global theme and illustrates the fact that today, it is more important to be invested in the most promising sectors than to think in terms of geographic allocation. To illustrate, it was better to invest in South Korea or the United States rather than in Europe, but above all, to invest in companies such as TSMC or ASML rather than in the healthcare or consumer sectors. The question is now whether this trend will continue or whether it is beginning to go too far. So far, the rally in these companies’ share prices reflects improving earnings expectations, with valuations not fundamentally different from those observed two or three years ago. It is also worth noting that what can be extended to the majority of equity markets: the gains observed this year are driven more by earnings growth than by multiple expansion. Over the longer term, however, several questions arise, in particular that of circularity, i.e. the fact that the expenditures of some constitute the revenues of others. We are talking primarily about American hyperscalers, which essentially live within their own ecosystem. Whether the return on these capital expenditures (still uncertain) will remain sustainable over time is an open question. To conclude on the AI theme, let us finally mention the upcoming IPO of SpaceX, whose valuation could reach $2 trillion, equivalent to 6% of US GDP and one of the ten largest companies globally, and this without yet being profitable. The sums at stake are such that today, everything related to AI has become a macroeconomic issue.
Macroeconomic Divergence Between the United States and Europe On the macroeconomic front, what stands out today is the divergence in momentum between the eurozone and the US economy, as evidenced by the gap between American and European economic surprise indices. The reasons are fairly straightforward: the United States is fully benefiting from the AItheme, which is virtually absent in Europe, and is also farless exposed to the rise in energy prices.
With both regions facing a similar near-term inflation dynamic, questions arise around monetary policy expectations. Over a 12-month horizon, between two and three rate cuts are anticipated in the eurozone, compared to just one in the United States. Starting levels are clearly different, but the risk of energy price increases spilling over into the broader economy appears significantly greater in Europe than in the US. The fiscal policy response from governments, which has thus far been measured, remains one of the key variables for rate dynamics in the months ahead.
A final word on the Middle East situation and an opaque oil market. It is difficult to assess whether the current equilibrium, which rests on demand destruction from the Middle East and Asia, combined with the drawdown of existing inventories, can hold over time to offset the supply shortfall. Could we find ourselves in three months with the Strait still closed and oil around $90? It seems entirely possible.
In this highly uncertain environment, we are maintaining equity allocations close to our benchmark weights, with a continued overweight in euro-area investment grade and a still constructive long-term view on gold and commodities.
June Outlook
Momentum is constructive, and a modest improvement at Hormuz would be enough to push indices higher, particularly in Europe. June will be shaped by the Space XIPO and the first press conference of Kevin Warsh, both of which could introduce a degree of volatility.
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