The stock market driven by the rise of artificial intelligence
The global equity index rose by around 15% in euros over the first six months of the year. The theme of artificial intelligence has once again proven to be very promising. This is evidenced by the very clear outperformance of technology stocks. As an illustration, the continued rise of the iconic Nvidia, whose price rose by more than 150%, contributing more than 3% to the performance of the global equity index over the first half.
Does the significant concentration observed within the American market – Nvidia, Microsoft, Alphabet and Apple represent around 25% of the S&P 500 – portend the emergence of a speculative bubble similar to that observed at the end of the 1990s?
The current situation seems very different to us. Valuations are not extravagant, with the profits of the majority of very large technology companies increasing significantly. The risk of correction therefore lies more in the sustainability of profit growth, in particular if demand linked to artificial intelligence weakens, which cannot be ruled out.
Surprisingly, the progression of the equity markets was in no way slowed down by the evolution of interest rates, a priori not very favorable to risky assets.
Changes in rate expectations
Expectations of rate cuts by central banks in the Eurozone and the USA have been significantly reduced in recent months, keeping short-term rates at high levels. The ECB has just initiated the easing of its monetary policy in June, with a first reduction (0.25%) in key rates since 2019. The continuation of the easing should however be very gradual, with a limited additional decline to 0.25% anticipated by the end of 2024. In the USA, the market is now counting on a decline close to 0.5% in rates over the whole of 2024. Signs of weakening consumption dynamics and the real estate market in the USA could indeed encourage the Federal Reserve to make an initial reduction in the coming months, despite the current electoral campaign.
Resurgence of political risk
On the bond yield front, we see German and US 10-year rates up more than 0.3% since the start of the year. However, the end of the half-year was marked by a renewed appetite for top-quality debt following the clear resurgence of political risk within the eurozone.
President Macron’s announcement of the dissolution of the National Assembly following the results of the European parliamentary elections led to a sharp expansion of risk premiums on French assets. The rate gap between a French and German 10-year bond has, for example, reached a high point since 2012. In view of current polls, the probability of an economic scenario where France would implement reforms essential to reducing its deficit public sector, which today peaks above 5% of GDP, is moving away significantly. We will therefore be attentive to the evolution of the political situation in the country and the consequences in terms of tougher financing conditions and economic growth that result from it.
