The all-important US inflation release, which was delayed given the shutdown, is finally out and looks like a welcome news for markets.
The downside surprise, showing a slower rise relative to expectations, will reinforce investors’ views that the Fed will cut interest rates next week, with more cuts likely to follow. Right now, the US economy is holding up better than many feared.
After a volatile first half of the year, distorted by tariff-related swings in trade, growth has regained momentum as trade policy became clearer. Earnings are solid, and the next phase of policy looks tilted towards tax cuts and deregulation, both supportive for markets.
Against this backdrop, we’ve recently decided to increase our US equity stance to a small overweight. We believe the mix of fiscal support, easier monetary policy and resilient earnings could lift US equity markets further. Our US economic growth forecasts are now above consensus.
Meanwhile, the AI investment cycle is in full swing. US spending on data centres and intellectual property is booming and now surpasses traditional capital expenditure on machinery and equipment.
AI excitement has some investors flashing back to the dot-com bubble. There are a few similarities, such as market concentration and heavy capital spending, but we believe there are many more significant differences, which is why we wouldn’t characterise the current environment as dot-com style speculative hype.
First, the success of the dominant US tech companies has been mostly driven by strong earnings growth, not just soaring valuations.
Second, while valuations are high, they are still far from the extremes seen at the peak of the dot-com era.
And, third, unlike the late 1990s, so-called AI “hyperscalers” like Amazon, Alphabet and Microsoft are funding AI from cash flow, not debt.
We believe investors should stay exposed to AI trends while diversifying portfolios across geographies and asset classes to capture other sources of return and mitigate risks.
By Daniele Antonucci, Co-head of Investment and Chief Investment Officer at Brown Shipley
