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I showed this chart last week, but I continue to think it is the most important chart for the macro/equity market outlook.
We have just been through a blockbuster US earnings season (see below) but a key support for this (and hence a key risk for the future) is all the money piling into AI infrastructure investment. But Q2 showed that the demand might actually be there to pay for all the data centres. Amazon’s cloud revenue grew by 37% year on year in Q2 and Google’s grew by 82%. As long as it looks like there is a return on the investment the five Hyperscalers (Alphabet, Amazon, Meta, Microsoft, and Oracle) are making then the market will continue to support and reward this AI spend. And the chart above shows that revenues for OpenAI and Anthropic, the two largest customers for the Hyperscalers, have actually accelerated so far in Q3. US earnings growth rates have been remarkably strong recently and this has been an important part of the story:
Continued AI investment strength has been good for equity markets in August. But it also has implications for bonds. US CPI inflation came in line with expectations this week. UK CPI is due next week but the last two data points have been pretty soft. Normally softer inflation is good news for bonds. And it probably is at the very front end (it looks very unlikely we will have a rate rise in September for instance). But if, in 2022, the rates market was all about inflation, its importance is much less today I think. Instead, it is the supply of debt that is coming into the market that is keeping interest rates (and your mortgage rate) higher. Part of this is, of course, ongoing government deficit spending. But part of it is AI investment driven. The five Hyperscalers are estimated to be borrowing around $250bn in 2026 and $400bn in 2027. More bond supply means, at the margin, higher interest rates. It is hard to be too excited about the outlook for longer-dated bonds even if you think (as I do) the inflation outlook is slowly improving. So even with the softer inflation data we have seen recently, UK interest rates are still expected to rise, not fall, over the next 12 months.
Abundance
But it is also August. The markets definitely had a quieter feel this week. And so I thought I would finish with a quote I saw yesterday:
Amongst all the Sturm und Drang of the daily newsflow, it is worth remembering that for the price of a Spotify subscription, this dream has already been obtained. And OpenAI and Anthropic (as well as plenty of others) are beginning to make superhuman intelligence freely available. There are plenty of concerns about all the newly minted tech billionaires out there. But it is notable to me how egalitarian a lot of the tech advances really are. Most people have the same phone, the same music subscription and access to the same AI models as the richest people on earth. Long may this continue.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
