Markets high on AI

• Emerging market equities, which advanced +3.61%, bolstered by a +10.28% rise in Korean stocks
• Japanese equities, which added +1.50%

• Brent crude oil, which remained volatile declining -14.73% in US dollar terms
• UK equities, which bucked the wider market trend for the week and declined -0.53% 

All returns in sterling terms unless stated.

Market performance continues to suggest investors are currently more excited about the Artificial Intelligence (AI) infrastructure boom than worried about the Iran war – whilst keeping tabs on longer-term bond yields. Although the sector collectively amounted to “only” 29% of global equity market capitalisation in January, it has delivered around 60% of the MSCI All Country World Index’s total return year-to-date. The share is higher still for the S&P 500, Korea and Taiwan. In Europe, fully half of the equity market’s performance has been derived from tech, even though it only amounts to 7% of the market. 

Many indices therefore hit all-time highs last week. The rally tipped the valuations of semiconductor manufacturers Micron and SK Hynix over $1trn. Both invested in Anthropic’s latest capital raise which valued it at $965bn – around 2.5x higher than in February. Meanwhile, Dell shares jumped more than 40% after it beat earnings forecasts, and Meta announced a premium subscription service across Facebook, Instagram, and WhatsApp, partly to support its investment in AI infrastructure.

Several factors could put a brake on the tech rally. Higher energy costs could compromise the AI-capex boom. And inflation could force up interest rates and constrain financing. Longer-term, weaker economic growth and higher government borrowing and interest costs might restrain it. If investors lose confidence that inflation is under control, policymakers might hike rates in response. In such an environment, interest-rate sensitive assets, including high-growth tech, could be affected if analysts re-evaluate the present value they assign to future cashflows. Confidence is key.

All that said, earnings per share growth looks solid for the S&P 500 this year. If AI turbocharges growth, companies invest wisely, and geopolitical tension cools, a tech-led rally could persist before company earnings diffuse throughout the global economy.

The US Federal Reserve’s (Fed) preferred measure of inflation increased by 0.4% in April, bringing the 12-month rate to 3.8%. The Personal Consumption Expenditures (PCE) price index rose a little less than expected over the month. And, while the headline annual print was the highest since May 2023, the slightly softer monthly data could suggest price pressures have begun to ease. Meanwhile, US GDP was unexpectedly revised down to an annual rate of 1.6% for the first quarter of the year. The initial estimate had been for growth of 2%. The US Commerce Department stated that downward revisions to consumer spending and investment were to blame. Although the print was still notably up from the 0.5% growth recorded over the final quarter of 2025, which was heavily impacted by federal government shutdowns.

Elsewhere, the US labour market continues to demonstrate a level of resilience. Although jobless claims edged up according to the latest data, 2026 has not seen a continuation of the marked slowdown witnessed last year - when tariff-related uncertainty and a crackdown on immigration gave employers pause for thought. A flurry of further US labour market data is due this week.

Market pricing suggests that the Fed will keep rates on hold until late in the year at least, but now price the next move being a rate hike. While economists still expect inflation pressures from the Iran war to be transitory and the Fed to resume rate cuts, policymakers are having to weigh the inflation uncertainty alongside a moderating (rather than weakening) labour market. Rising energy costs contributed notably to April’s inflation print, but prices rose elsewhere too. The core PCE index, which strips out volatile food and energy costs, still rose 3.3% year-on-year. New Fed Chair, Kevin Warsh, might be keen to lower the benchmark rate, but may find it hard to form such a consensus amongst members of the rate-setting Federal Open Market Committee (FOMC) any time soon.

With US President Donald Trump eager to move global supply chains closer to home, US and Mexican negotiators held trade talks last week aimed at revamping the US-Mexico-Canada Agreement (USMCA). The discussions, the first of three scheduled rounds of negotiation, centred on key sectors including autos, steel and aluminium, medical devices, labour and supply chain security. Other issues not covered in the 2020 agreement, including AI and critical minerals, are also likely up for discussion. It remains unclear whether talks involving Canada will take place. The US and Canada are seemingly still someway apart on trade, with Canada unaccepting of the imposition of US tariffs. If the three countries do not confirm an extension, the USMCA will move to annual reviews, creating long-term uncertainty for businesses. Should any party wish to withdraw from the agreement altogether, it can do so with six months’ notice. US Trade Representative, Jamieson Greer, noted that the US intended to maintain tariffs of some level on both Canadian and Mexican goods under the USMCA, although preferential treatment could be secured. The agreement and its prior iterations had created a tariff-free North American zone for almost $1.6trn in annual trilateral trade. 

• ISA changes: The Treasury is reportedly considering a 22% tax on cash interest earned within stocks & shares ISAs. The move is aimed at stopping savers from circumventing planned cut to the cash ISA allowance. Any changes are expected to take effect from 6 April 2027, although final details are still unconfirmed
• UK energy bills set to rise: Ofgem has confirmed household energy bills will rise by 13% from July compared to the last price cap period. Higher global energy prices linked to the Iran conflict explain much of the increase
• US mortgage rates: Average 30-year mortgage rates in the US have risen to 6.53%, their highest level in nine months, according to mortgage corporation, Freddie Mac. A higher rate can add to cost for borrowers and reduce consider purchasing power
• China’s factory profits: China’s industrial profits rose +18.2% year-on-year in the January-April 2026 period, building on a 15.5% rise in the first quarter. The rise was helped by strong AI-related demand and surging oil prices. A long property slowdown and weak retail spending continue to drag on growth, however
• Japanese inflation: Headline inflation unexpectedly cooled to its slowest pace in four years in May. The +1.4% year-on-year print was below the +1.6% rise expected and the +1.5% recorded the previous month. Government support measures, including lower utility costs, education fees and a gasoline price cap, helped reduce price pressures
• Japan retail spending: Japan’s retail sales rose +2.1% in April, beating the +1.3% expected. The uptick was driven by strong car and clothing sales. Government support and rising wages appear to be supporting consumer spending
• EU car registrations: New car registrations grew +5.1% year-over-year in April, marking the third consecutive increase, reflecting strong consumer demand for electric vehicles
• Ferrari EV launch: However, luxury car maker Ferrari saw its shares fall more than -8% after unveiling its first fully electric car. The Ferrari Luce carries a €550,000 price tag
• Samsung ends staff dispute: Samsung has agreed a profit-sharing deal with workers in its memory chip division, avoiding a threatened 18-day strike. Bloomberg estimates that around 78,000 employees could reportedly receive bonuses worth up to £250,000 each following strong AI-driven profits. The deal was mediated by the South Korean government as the company accounts for about a quarter of the country’s exports
• Nvidia plans to expand in Taiwan: Taiwan’s stock market closed at a fresh record high after Nvidia announced plans to increase annual spending in the region from $100bn to $150 bn. CEO, Jensen Huang revealed plans for a new Taiwan campus that could house four times more staff than the company currently employs locally

 

 

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.