AI earnings shield US stocks, but bond risks rise: Jefferies' Wood
US equities have largely remained strong, aided by robust earnings growth driven by the AI capital expenditure cycle. Rising bond yields and geopolitical tensions, however, are beginning to impact investor sentiment negatively. Analysts are concerned about the sustainability of the AI capex cycle and its expected returns. Additionally, there is a realization that G7 government bonds are entering…
Mumbai: US equities have largely weathered the storm of rising bond yields and geopolitical tensions this year, buoyed by robust earnings growth driven by the artificial intelligence (AI) capital expenditure cycle, according to Jefferies global equity strategist Chris Wood. Yet, the bond market is now approaching a threshold where the risks to equities are intensifying, especially with the Federal Reserve adopting a more aggressive stance, Wood stated in his newsletter Greed & Fear.
The yields on US ten-year and 30-year government bonds surged to 5.34% and 5.69%, respectively, reaching their highest levels since April 2002 and May 2002, contributing to the decline in Indian equities, which witnessed their eighth consecutive week of losses by Friday.
While US stocks typically underperform in the lead-up to mid-term elections before rallying afterward, this year's pattern diverged from the norm, according to Wood. The stock market has shown relatively poor performance heading into the mid-terms, a departure from historical behavior, largely due to the exceptional earnings growth fueled by the highly accretive AI capex cycle, he explained.
Investors are grappling with three key challenges, according to Wood. The first and most critical for equities is the duration of the AI capex cycle and whether the substantial spending will generate adequate returns. The second concern is the emerging realization that government bonds in the G7 are entering a structural bear market. Lastly, Wood noted the evolving geopolitical landscape as a third issue that investors must confront.
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