Technology

The stratospheric valuation of this year’s AI mania is likely to deflate, just as it did after the Web 1.0 mania of the late 90s. We go through some long-term and short-term investment implications.

In June, the rally gained momentum and broadened due to positive economic data, particularly in the housing market. We expect cheaper cyclical sectors and styles to mark a change in leadership as the rally broadens, helped on by excess cash on the sidelines. We upgrade Banks to equal-weight, and Homebuilders to overweight. The rally may continue but a soft landing continues to be elusive - disappointment may be in store.

Momentum, high cash balances, FOMO, and expectations of soft landing drive the market higher. This rally may continue for a while, but macroeconomic headwinds are intensifying and will eventually derail the rally. It is too early to celebrate victory.

Investors are still cautious and have significant cash that needs to be put to work. Trickle-down of it into the US equity market may extend the rally. Overly bearish futures positioning is also a strong contrarian indicator. Disinflation is good for real earnings growth, and imminent earnings rebound may add support for equities.

The AI revolution is having a large impact on many US stocks but European equities have not enjoyed the same benefits. Is Europe really devoid of AI plays?

Global semiconductor demand will continue contracting, even though the pace of decline will moderate in 2023H2. While demand has increased briskly for Artificial Intelligence-type semiconductors, this will not be enough to lift aggregate global chip sales out of contraction. While momentum could push Emerging Asian semiconductor stocks higher in the short term, their share prices are vulnerable to the downside due to shrinking demand.