AI
Are you sure you are in a trade war-induced selloff and/or recession? Or, is America – writ large – the bubble? Fed a steady dose of fiscal profligacy over the past five years, the US economy and its various associated assets have become fat and complacent. As such, the end of the fiscal gravy train – our signature macro call for 2025 – is what is causing the underlying weakness, with the Big Tech – the biggest beneficiary of US Exceptionalism – now buckling.
Our message? The tech bros are lying to you. The AI revolution is not positive for Big Tech, not at their current valuation. Play the rotation, even if a (mild) recession may be afoot, as we have been saying throughout 2024.
In Section II, Jonathan presents a checklist that investors can use to confirm whether AI’s purported productivity gains are real. The checklist does not currently suggest that artificial intelligence is meaningfully boosting productivity growth. US equity valuation reflects very significant optimism about AI, underscoring the profound risk facing equity investors if the narrative about AI shifts in a pessimistic direction.
In Section I, Doug notes that the chaos of the new administration, including bellicose tariff threats and DOGE’s abrasive and indiscriminate approach, are sowing uncertainty and fortifying economic headwinds. Lowered guidance of prominent retailers, alongside weakening services PMIs, bode poorly for economic activity considering that improving manufacturing PMIs likely reflect tariff frontrunning. A recession remains our base case, suggesting that investors should be underweight stocks within multi-asset portfolios. In Section II, Jonathan presents a checklist that investors can use to confirm whether AI’s purported productivity gains are real. The checklist does not currently suggest that artificial intelligence is meaningfully boosting productivity growth. US equity valuation reflects very significant optimism about AI, underscoring the profound risk facing equity investors if the narrative about AI shifts in a pessimistic direction.
Interest rates will decline if the disinflationary trend continues, deficits are reduced, or economic growth falters. Oil prices are likely to spike over the short term, but the long-term outlook is unfavorable. Not all GenAI investments will pay off, and GenAI-induced productivity improvements do not justify current valuations.
DeepSeek's AI breakthrough will likely enhance China’s productivity gains. But does it justify a re-valuation in Chinese tech stocks? Sustaining the Chinese tech rally will require corporate profits to overcome the pressures of China’s deflationary cycle. Meanwhile, DeepSeek’s innovations may fuel greater competition, intensifying price wars and putting further strain on Chinese tech companies’ profit margins.
China barely hit its growth target in 2024 by shifting back to its old model of exports, racking up a record trade surplus with the world – right as Donald Trump walks back into the White House. Tariffs will elicit larger fiscal stimulus even as China rolls out innovations such as DeepSeek to meet its 2025 industrial goals, creating a volatile mix this year.
US tech stocks as a share of world stock market capitalisation is at an all-time high that exceeds even the peak of the dot com mania in 2000. At the other extreme, Europe’s share in the world stock market is at a 50-year low. While I am optimistic about the potential of generative-AI, I am not as manically optimistic as the market. And while I am concerned about the current malaise in Europe’s economy and politics, I am not as depressingly concerned as the market. For me, the AI mania combined with Europe’s current malaise is a 50-year mispricing… and opportunity. Plus: go tactically short coffee.