Equities

The S&P 500 performance was flat in May if not for the strong performance of a small cohort of mega-caps, aided by exposure to AI. Earnings and sales growth are contracting but analysts expect a rebound into a yearend, which is already priced in. Yet, inflation is still elevated, and the job market is stubbornly tight – rates will stay much higher for longer, eventually ending the party. Until then, the lopsided equity rally may continue.

In response to client questions, we offer our view on the purported link between tech stocks and interest rates, the similarities between the S&L Crisis and the current banking turmoil and the near-term outlook for consensus economic expectations.

The AI craze could further lift stock prices, boost capex, and delay the onset of the next recession. Looking further out, reaping the profit windfall from AI may take longer than many investors expect.

Symptoms of a liquidity trap for Chinese households are appearing. Our proprietary indicators for the marginal propensity to spend among households and enterprises continue falling. There has been a paradigm shift in Beijing’s approach to policy stimulus. Authorities will be slow to introduce large stimulus. Hence, China-related financial markets are set to fall further.