Space dreams versus Earth reality

Over the last month, central banks have taken an increasingly hawkish turn that has forced markets to start reassessing the AI trade’s remarkable momentum. As inflation continues to rise, policymakers have remained cautious despite positive headlines around a US/Iran ceasefire deal. 

Optimism around the AI trade has been the main driver of risk assets, with momentum stocks leading. But due to rising uncertainty on potential future hikes, markets have started to question whether AI’s elevated valuations can remain justified, particularly in a more uncertain interest-rate environment with increasing IPO supply. Rotations have already started to materialise, as investors take profits and broaden exposure into less crowded areas of the market. 

Looking ahead, concerns around AI profitability, valuations and concentration risks are likely to persist. Capex overspending and lacklustre results remain key risks for US hyperscalers, especially as the recent rally in memory-chip makers may be showing signs of excess. Well-backed IPOs can help support the market, but more players and more metrics for assessing the AI space will increase the scrutiny of current leaders and could drive broader diversification. Against this backdrop, we still see growth holding, but not strongly enough to offset rising macro costs and broadening price pressures.

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