AI and Markets
Broad GenAI adoption and monetization, alongside falling inference costs, should make hyperscalers’ and enterprise investments worthwhile. While the GenAI boom echoes the dot-com era, it differs in key ways: Valuations are elevated but not extreme, and the rally is still underpinned by solid earnings growth. With few warning signs flashing red, the bull market likely has further to run, though a period of consolidation is overdue.
Big Tech and the Trump administration are engineering an industrial boom that favors American hardware over American workers. Economic growth will be robust in the US but the labor market will stay relatively sluggish. Adopt an overweight stance on both equities and fixed income and underweight on cash. Upgrade Canadian equities and downgrade the UK. Upgrade Industrials and downgrade Consumer Staples. Upgrade EM Debt. Downgrade Private Credit.
While it is impossible to know exactly when global equities will peak, there are now enough vulnerabilities to justify keeping one’s finger near the eject button.
The AI boom has had less of an impact on the economy than widely believed. This may eventually change, but the risk is that investors grow impatient before it does.
GenAI momentum is building. Many companies are already reaping benefits from the technology. GenAI is disrupting entire industries, such as education, image generation, and staffing. Investors should prefer our “disruptors” basket over the “disrupted” basket.
This week our three screeners highlight plays in global small-cap value stocks, gold miners, and stocks exposed to an exciting structural investment theme: Space.
We maintain our 12-month US recession probability at 60%. However, until the “whites of the recession’s eyes” are more clearly visible, we would refrain from moving to a fully defensive stance.
Over the first half of 2025, AI capex outpaced both consumption and all other investments in its contribution to US growth. Like all other capex cycles this one will end in tears. However, the indicators we track suggest that AI capex can continue supporting growth and markets for now. Remain Neutral on equities. Upgrade Health Care to Overweight and downgrade Consumer Staples to Neutral. Buy tail risk protection.
Artificial intelligence will destabilize domestic politics and international security. States will try to adopt more creative fiscal policy, including by raising taxes on Big Tech.
Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.