The year is drawing to a close with most risk assets in positive territory, and global stocks and metal prices seeing multiple highs. Even the longest US government shutdown in history didn’t curb market enthusiasm. We think markets have been looking through the weakness in the belief that monetary and fiscal policy levers will be available for support, that profitability of AI investments is almost a given, and that corporate earnings will continue to exceed expectations, following a strong results season in the US, somewhat less so in Europe. The tariffs’ impact on consumption is also largely being ignored.
A breather after buoyant markets
However, recent concerns over artificial intelligence-led euphoria in the US affirm our stance. We maintain our view that AI capex is boosting the US economy, but is not leading to job creation. Furthermore, while monetary and fiscal support may stabilise the economy, risks in the form of fiscal dominance and financial repression persist. In particular,
- US growth picture is mixed. AI investments are positive, but consumption and labour markets are softening. Although the top income earners have been driving spending this year, as low- and middle-income consumers struggle, overall consumption will be affected. For instance, expiring health care subsidies at year end will lead to an increase in health care costs for such households. In addition, softening of US labour markets will continue and wage growth will moderate. Finally, risks to the independence of the Fed remain. If the Fed yields to the pressure, it might cut rates more than what’s needed purely by economic considerations. This may de-anchor inflation expectations.
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