Back to an AI-Driven Market as Investors Move On From the Iran Conflict
As the AI trade rips, losses pile up in the market for private credit and bond spreads are widening sharply.
Key Takeaways
The AI Trade is Propping Up Equities: We start the week with U.S. equity futures modestly in the red as the talks with Iran have stalled out yet again — the massive move back into the AI trade has helped blunt what would have been a far bigger blow just a short two weeks ago (see Big-Company Profits Overcome Headwinds in today’s Wall Street Journal). A wide divide has emerged between the Tech sector, which is on track for a +48% YoY profit surge in Q1, and consumer-facing sectors of the S&P 500 with profits barely up +3% — yet another K-shape to this economy.
Bonds Are Selling Off Again: Bond yields are on the rise everywhere — by about +4 basis points across Europe (4.9% for 10-year gilts) and Japan (2.45%) and by +2 basis points in the U.S. (4.32%) — even though the lone global economic datapoint overnight was a stinker in the form of German consumer confidence, which deteriorated further to -33.3 in May from what was already a bad -28.1 reading in April. What overshadowed that recessionary statistic was the release of an ECB survey of businesses showing a hook-up in expected selling prices to +3.5% for the next twelve months, from +2.9% in the prior forecast.
Another Comment on the K-Shaped Economy: I am not sure it is well known that beneath the veneer, 118 stocks in the S&P 500 are still down more than -10% from their pre-war levels — mostly the ones vulnerable to the rising costs for fuel, aluminum, and other raw materials, and those dependent on sales to customers. That compares with only 82, mostly in the large-cap AI-related space, whose share prices are up more than +10% since the end of February. Strip out the Mag Seven (five of which report this week), and the market is down over the past two months. The S&P 500 has rallied +4% above the pre-war level, even though half the membership is still in the red column.
