Copyright timesofmalta
Financial markets are currently dominated by excitement surrounding Artificial Intelligence (AI) and the impressive gains in equities. US equity markets are currently hitting record highs on a regu-lar basis, driven by seemingly unstoppable surges in technology stocks. Media attention is clearly focusing on AI-related events and trends. For example, key headlines in recent days have put the limelight on NVIDIA Corporation reaching the $5 trillion in market capitalisation as a protagonist of the AI boom and on Wall Street’s keen interest in capital expenditure plans of technology companies. On the other hand, it is also noted that mentions of a ‘bubble’ are, to a certain extent, also increasing. The most pessimistic narratives even point to a hypothetical replay of the ‘Dot-Com’ era playbook. Admittedly, the debate on whether the current equity market scenario and the fixation on AI are reflective of an overvalued market, or even of a bubble, has been ongoing for more than a year now. However, developments over recent weeks and days have made this theme more salient. While this is not an attempt to formulate a conclusive view, we hereby highlight a number of considerations in this respect. As a premise, it is relevant to note that beyond the hype surrounding the tech sector, positive momentum in equity markets is justified by a number of other factors. There was an improvement in the scenario for trade and relative agreements, which have been impacting investor sentiment at different points during recent months. Also positively, last month’s data showed that both headline and core CPI inflation were lower than expected, even though the annual rate remained at 3%. In turn, this data facilitated the Fed’s decision to cut rates by 0.25% this week but left some doubt on prospects for another cut in December, which moderated the otherwise sanguine mood. It is also relevant to note that mainly robust quarterly earnings are also driving the ongoing rally in equities. A high proportion of companies are beating analyst forecasts and doing so by comfortable margins, compared to historical averages. The positive impact on profitability from relevant AI-related capital investments, productivity gains and demand growth is tangible. Natural examples include Alphabet Inc. Its robust third quarter performance illustrated the increasing prominence of AI in its search, cloud and advertising operations. Investors also cheered Microsoft Corporation’s consolidation of the value in its OpenAI holding, in addition to its overall operating performance. In Europe, ASML Holding NV highlighted its optimism on demand from the AI sector for its advanced chip-making segment and the partnership with Mistral AI (a French AI tech startup) is also generating interest. Beyond technology giants, Caterpillar Inc., a leading manufacturer of construction and mining equipment, engines, and turbines, which is viewed as a ‘bellwether’ of industrial trends, posted robust earnings on the back of strong demand for its power generation systems driven by investments in data centres. The distinction made between the ‘Magnificent 7’ and other sectors is a rele-vant consideration when assessing whether equity markets (particularly US equities) are in bubble territory. In terms of the structure of the market, the technology sector accounts for a relatively high portion of the US market and technology earnings growth has indeed outpaced that of other sectors. When comparing current market conditions to those during the Dot-Com era, evidence is being put forward on both sides of the argument. While market concentration is a feature of today’s markets, most analysts would argue that valuations, on the basis metrics such as those related to earnings growth and cash flow genera-tion, are less stretched than during the late 1990s-2000. On the other hand, we would also note that financial conditions, as also reflected in low bond market volatility, are particularly benign at the moment. Any reversal in this respect would have a detrimental impact across risk assets. Inflation does remain above the Fed’s target and it is possible that the impact from tariffs is yet to be felt. The Fed itself has noted a degree of weakening in the labour market and the current exuberance surrounding equities could be leading investors to downplay risks related to the government shutdown. Within this context, the widely recognised benefits of diversification, including diversifying across both sectors and geographies and of maintaining a well-balanced portfolio, become even more important. Karl Falzon is head of capital markets at Curmi & Partners Ltd. The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.
