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MAJOR US stock markets drifted lower on the week as the prevailing narrative continues to shift from “AI awe” to an ‘”AI-poor” mindset. There are two key issues weighing heavily on the minds of investors.
The first is whether the projected AI-related capex spend by the so-called hyperscalers (Alphabet, Amazon, Meta and Microsoft) transpires to be the greatest misallocation of capital in history, as previous asset-light business models become “asset heavy”.
For context, the hyperscalers are projecting AI software revenues of c$45 billion in 2026 against a projected capex spend of a whopping $650 billion. This FOMO-driven capex mania equates to a price-to-sales ratio of 14x or 1,400%, extremely expensive by anyone’s book.
The second major question concerns the growing number of industries and sectors that are seemingly vulnerable to disruption in what has become known as the “AI scare trade”.
Having already torpedoed the technology software sector, Mr Market turned his attention to private credit companies, insurance brokers, real estate service stocks and listed logistics companies, leading to sharp share price declines as investors reassess the long-term viability of their respective business models.
This shifting narrative around the Mag7 theme is driving major style rotations and a push from investors for geographic and sector diversification away from AI and towards “real asset/old economy” stocks. That might explain the continued underperformance of America’s large cap stock markets (the S&P500 index, Nasdaq technology index) relative to ex-US developed and developing markets so far this year. Value stocks are sexy again, outperforming formerly fashionable growth stocks for the seventh consecutive week.
On the macro side, the two most eagerly anticipated data releases concerned the US employment and inflation picture. Employers added 130,000 jobs during January, the highest net new additions in over 12 months, while the aggregate national unemployment rate ticked down to 4.3% (from 4.4% previously). Investors moved quickly to slash odds of rate cuts from the Federal Reserve in 2026, before Friday’s inflation reports (including CPI and core CPI) pointed to a far more benign inflation outlook.
Softer inflation data will have been warmly welcomed by certain members of the Federal Reserve as it seeks cover for the aggressive interest-rate-cut cutting cycle that Trump and team MAGA are demanding. Markets are eyeing a June rate cut, with roughly 62 basis points of total easing expected this year, implying two quarter-point cuts and about a 50% probability of a third in 2026.
Amid the noisy day-to-day headlines, corporate America remains in good shape. The reporting season so far reveals that S&P500 companies have delivered aggregate year-on-year earnings growth of +12%, five percentage points above consensus estimates.
Unusually for the first quarter of the calendar year, many companies are also raising their full year guidance, which suggests underlying business conditions are buoyant.
Away from America, Japan provided a potentially pivotal moment as Prime Minister Takaichi’s ruling Liberal Democratic Party romped to victory in the snap election, securing a two-thirds supermajority in the lower house with 316 seats secured out of a possible 465. Her strategy rests primarily on three pillars: expansionary economic and fiscal policy, hawkish moves on the security front and domestic legislation rooted in conservative values. So far, the stock market likes what it sees.
Turning to commodities, Brent crude oil hovered at around $68 per barrel amid heightened tensions between the US and Iran ahead of a second round of talks.
The Donald has repeated his threats of potential strikes if a nuclear deal is not reached. Over the weekend, Iran signalled willingness to make concessions on its nuclear programme if Washington engages on lifting financial sanctions.
Despite these geopolitical factors, oil prices remain under pressure owing to ample global supply, with reports suggesting some OPEC+ nations see room to resume supply hikes in April. The International Energy Agency also reaffirmed its projection of a significant surplus in 2026.
Turning to the week ahead, investors now await the minutes from the Federal Reserve’s last meeting, advance GDP data and the core Personal Consumption Expenditures price index, the central bank’s preferred inflation gauge, for further guidance.
And, amid a continued deluge of earnings reports, Walmart, Booking Holdings, Deere & Company and Palo Alto Networks will probably set the market tone.
