We could make this very short by saying ‘what we said last week’, or we could waste some column inches speculating about why markets appear to have been right not to get too worked up about the US debt ceiling deadline. Either way, all that mattered in markets was AI, and not just who is going to make money in this space but who already is. At the beginning of the week, Nvidia, this year’s outright market darling and many investors’ top pick for biggest AI beneficiary, was trading on a hefty 70 times multiple of expected earnings, but by Friday it had reported blow out earnings and guided higher, leaving it up another 25% on the day, and still trading on much lower multiple of next year’s earnings. Reasonable estimates of very plausible earnings would see it trade on a fairly moderate earnings multiple within a few years, underscoring the fact that unlike previous tech investing fads, this is based on actual earnings as much as hope.

The wider S&P Information Technology Index also led the way, with a mixture of hardware and software AI beneficiaries, like AMD chips, Marvell Technologies, Broadcom, and Adobe all up by 20-40%. Microsoft was up by another 5% and was one of the biggest contributors by virtue of its size. The IT index is now just 5% from its December 2021 highs. Nevertheless, there were signs of resilience elsewhere in the US economy, as Abercrombie and Fitch also surprised with strong enough earnings to see its share price jump 30%, while PacWest (one of the distressed US regional banks) jumped 20% as it showed signs of being able to shore up its balance sheet.  

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Most other markets were fairly soft and ended down 1-2% (including the US market, if you exclude the IT sector). This may reflect the fact that the inflation outlook actually worsened somewhat, with the US PCE Inflation gauge coming in slightly higher than expected and pointing to stubbornly high services inflation and surging consumer spending. That pushed bond yields up (and prices down) around the world, even in New Zealand where the RBNZ surprised the markets by signalling that they did not expect to raise rates anymore. The US Dollar strengthened a couple of percent against most currencies. The biggest spike in short term yields was in the UK, where the Bank of England conceded that they were definitely not finished hiking, as the much-feared wage/price spiral was very much in evidence. Meanwhile in Australia, weaker than expected retail sales pointed to a more muted outlook, which appeared to be corroborated by weak results from City Chic and Universal Store Holdings. Commodity markets were generally soft, apart from energy, and the materials sector accounted for most of the local market’s 1.7% fall.

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