Investment Viewpoint: AI strength offsets policy headwinds

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways:

1. Global equity markets rose, supported by strong Nvidia results. Easing tensions in the Middle East helped support market sentiment, although geopolitical uncertainty remains.
2. Federal Reserve Chair Warsh’s hawkish comments at the Jackson Hole symposium pushed the expected path for US interest rates higher, weighing on financial markets.
3. US core inflation remained at 3.2%, keeping inflation concerns firmly in focus.
4. The powerful wave of innovation in artificial intelligence continues to support earnings growth and our investment outlook.

How did financial markets perform last week?

• Global financial markets made modest progress over the past week. World equity markets rose by almost 1% in euro terms, while bond markets were broadly unchanged. On the positive side Nvidia results gave equity markets a boost but on the negative side Federal Reserve Chair Warsh’s comments at the Jackson Hole symposium were more hawkish than expected. Meanwhile geopolitical developments continued in the background.
• The conflict in the Middle East remained an important focus for investors. Encouragingly, tensions eased somewhat during the week, helping Brent crude oil prices move lower. There were also signs of improved shipping activity through the Strait of Hormuz, a key route for global energy supplies. While these developments provided some reassurance to markets, uncertainty remains and investors continue to monitor events closely.
• One of the key market events during the week was the release of results from technology company Nvidia. The company once again reported results that were ahead of market expectations, with strong growth in both revenues and earnings. Importantly, management indicated that demand for its products continues to exceed available supply, reflecting ongoing investment in artificial intelligence and related technologies. This supported technology shares globally and helped make the information technology sector the strongest performing sector of the week.

What were the key economic and political developments last week?

• Economic data releases were relatively light during the week. In the US, the most closely watched release was the Personal Consumption Expenditures (PCE) inflation report, which is one of the Federal Reserve’s preferred measures of inflation. Core inflation remained at 3.2% year-on-year, indicating that price pressures remain above the Federal Reserve’s long-term target. While inflation has moderated from previous highs, it remains sufficiently elevated to keep monetary policy firmly in focus for investors.
• Another major development last week was the speech by the Chair of the Federal Reserve K Warsh. In it he went back to the line he adopted when he was first appointed as Chair. Getting inflation back to target levels is his main priority and the main way of doing that was using interest rate policy. As a result, the forecast path for US interest rates has moved up which is weighing on all financial markets
• Political developments in France also attracted attention. The campaign ahead of the presidential election continued to focus heavily on the country’s public finances and government debt levels. Investors are monitoring the range of policy proposals being put forward by candidates, as these may have implications for France’s fiscal position and its relationship with the European Union. As the election campaign progresses, market volatility could increase if policy uncertainty rises.

What does this mean for our investment outlook?

• Overall, last week’s developments did not result in any significant change to our investment outlook. The most important theme continues to be the powerful wave of innovation taking place within the technology sector. Strong demand for artificial intelligence-related products and services continues to support earnings growth for many companies and has the potential to contribute positively to broader economic growth over time.

The week ahead: what to watch out for

Looking ahead, this week will bring a much busier schedule of economic data releases. In the US, investors will focus on the monthly non-farm payrolls employment report and the latest Institute for Supply Management (ISM) business surveys, particularly the services sector data. In the euro area, inflation figures and retail sales data will provide further insight into the health of the economy and the outlook for interest rates. In China, the latest Purchasing Managers’ Index (PMI) surveys will offer an update on business activity across the manufacturing and services sectors.