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The US macro backdrop remains, with expected interest rate cuts of 1% into an economy that is growing, with the worst of the tariff shock behind it, and Trump tax cuts on the way. This is pretty friendly and, for me, it beats the UK (tax rises on the way) and Europe (where the rate cutting cycle is done for now). I am not surprised that the weaker dollar trend is over and we have seen some renewed dollar strength in recent weeks. We did not chase the weaker dollar/sell US assets trade in the first half of the year (as discussed here for example) and, for now at least, I am happy with that decision.
But that said, the risk to US assets remains an unwind of the AI boom. And, in particular, that all the data centre investment going on will end up being bridges to nowhere. I have discussed this a couple of times already here. For now we remain committed to our US investments which are nearly all passive and so have a full weight to the US technology giants (Nvidia is now over 8% of the S&P for example). AI and the US technology giants remain the dominant investing theme of today and we are not yet ready to abandon it. To give some comfort to the (understandably) nervous, Goldman Sachs was out with some research this week that suggests that the current levels of AI investment are still relatively controlled when compared to other investment booms. They estimate AI investments today are adding a bit less than 1% to US GDP. Here is how that compares to previous investment booms:
And I think there will be some return on this investment. Here are Goldman’s estimate for the productivity boost AI technology will generate. This will probably be slower to arrive than many hope today and will be spread over 15 years but, still, 15% is a lot. And if AI technology continues to improve this number could be higher. When I look at the US market trading at a 22x price earnings multiple that feels pretty bubbly. But if the gains from this productivity boost translate into better earnings growth then that higher multiple starts to make more sense.
The cloud on the silver lining here is that productivity growth means (by definition) doing more with less. And I think you can now start to see the impact of this on labour markets. Anecdotally, I think it is harder than ever for UK graduates to find graduate-level jobs. Part of the problem is that the sort of routine but time consuming and fiddly jobs you used to hire graduates to do can now be done by AI. Here is some data from a recent research paper on the US jobs market that supports that intuition.
There is little evidence (absent very specific examples like call centres) that people are losing their jobs to AI. It is, however, making it harder for talented young people to find them.
One other objection I hear regularly comes from the fact that the US stock market is very concentrated versus history with the Magnificent 7 tech stocks now comprising 37% of the S&P 500 and the US making up an outsized share of global indices. Absent one or two stocks (specifically Nvidia and Oracle) I am less concerned by this. It has been clear for a long time that there are increasing returns to scale in technology. A better product brings in more customers but more customers (be it on Google, Tiktok or Instagram) make the product better. It does not surprise me that the gains are accruing to a few big winners who keep winning. Normally, this is where government steps in. But the fact that the US feels it is in a (real or imagined) existential battle with China for global hegemony means that, for now, the regulators are muzzled.
And sitting out the US rally because of stock concentration risk and/or higher US p/es has been pretty painful. As an example, here is Nvidia’s share of the S&P 500 over the last 5 years. (This was produced by Chat-GPT in seconds and is exactly the sort of thing I would have previously asked a more junior employee to produce.)
Nvidia is clearly at the centre of all things AI. But I would add that its journey from 2022 to now is an increase of over $4.6trn, all of which has accrued to those who (like us) invest passively. To put this in context, the market cap of the FTSE 100 is $3.3trn. In investing, you need to own the winners. And when they are large, you especially need to own them.
I will wrap up with a chart that has something for the bulls and the bears. Below are the weights of global equity markets over time as a percentage of the global index. If you want to see how much fun and how much pain you can have in a bubble, just look at Japan which briefly reached almost 50% of global market cap in the 1980s but is only around 6% today. As for the US, it sits today at around 64%. This is high versus recent history but not when you look back to the post war period. At some point the AI cycle will turn and there may be good reasons to reduce your US technology exposure, but I don’t think stock or market concentration risk are good enough reasons today.
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.
