After several years driven by major technology stocks and enthusiasm for AI, the markets are entering a phase in which expectations are becoming particularly high. Julien Staehli analyses the new dynamics at play here and highlights why, in this environment, the ability to distinguish genuine opportunities from excessive expectations is becoming crucial.
Short-term valuations appear reasonable, but the CAPE ratio – at over 30 for the S&P 500 – suggests otherwise. How can one still interpret the market correctly with such divergent indicators?
The CAPE is a long-term measure, as it smooths earnings over a ten-year period. Above all, it serves as a reminder that US valuations remain high over time. In the short term, multiples do indeed appear more reasonable, and they partly explain the resilience of the equity markets; nevertheless, they are reaching historically high levels, particularly in the United States. Our internal market attractiveness indicators therefore suggest a degree of caution at present.
Expectations for earnings growth remain ambitious. They currently point to growth of around 22 per cent globally, 15 per cent in Europe and 26 per cent in the United States. The risk of disappointment is therefore automatically increasing, as a significant portion of the current rise is already based on a very favourable scenario.
In the United States, this momentum is largely driven by the technology sector. The sector is benefiting directly from massive investment in data centres and artificial intelligence. These investments now represent a major component of US growth, making the economy increasingly dependent on the digital cycle.
Investments by major technology groups, sometimes financed through debt, are beginning to weigh on their cash flows and are increasing their sensitivity to a rise in interest rates. The market therefore remains buoyant, but the margin for error is narrowing.
With equity markets at record highs, why is IPO and M&A activity still relatively subdued?
The slowdown in M&A activity is mainly due to rising interest rates, which are significantly increasing the cost of financing transactions. Current geopolitical uncertainties are also prompting investors to exercise greater caution.
Nevertheless, we have seen the return of mega-IPOs in the technology sector, with SpaceX, for example, which was one of the largest deals ever completed. Other major deals, such as those involving Anthropic and OpenAI, could also make their mark on the markets in the coming months.
The key question, however, remains how long this enthusiasm for technology and artificial intelligence will last. A significant proportion of capital flows is now driven by passive investment, the growth of which amplifies market movements. When a major new stock is added to a key index, index funds are obliged to buy it, which can further drive up the share price.
Furthermore, the rules for inclusion in certain major indices have changed. Profitability criteria and inclusion timelines have been relaxed, allowing certain large, newly listed companies to be included in benchmark indices more quickly. This automatically generates additional buying flows and can amplify market movements, fuelling speculation about a potential bubble.
Within the AI cycle, how do you explain the performance gaps between semiconductors and other segments, such as software, which are lagging behind?
Semiconductors are currently the main beneficiaries of the massive investment cycle in AI driven by the hyperscalers. The demand for computing power, infrastructure and data centres directly benefits players in the supply chain such as Nvidia, Broadcom and Micron.
Conversely, certain software segments are facing greater uncertainty. The emergence of new generative AI models, such as those developed by Anthropic with Claude, raises questions about the future role of certain traditional software publishers. This is one of the reasons why investors have increasingly turned away from this segment.
It is important to recognise that we are witnessing a structural shift in the tech sector’s business model. The sector has long been perceived as requiring little capital and generating strong cash flows. However, today, the investment required to develop AI infrastructure is becoming substantial. Several giants are, in fact, resorting to debt or share issues to finance this new phase of growth. This represents a profound change in the nature of the current technology cycle.
To what extent does the extreme concentration of indices around large-cap technology stocks impact your diversification strategies?
This concentration naturally prompts us to seek out the best risk-return profiles beyond just the large-cap technology stocks. Today, if we consider the ‘Magnificent Seven’ – adding Broadcom, AMD and Micron to the mix – they account for over 40 per cent of the S&P 500. This concentration obviously creates a significant dependence of the indices on a limited number of companies.
We therefore remain alert to opportunities for sector rotation. If the momentum surrounding artificial intelligence were to slow down or if expectations were to become too high, certain neglected sectors such as healthcare, consumer goods or industrials could regain favour.
The upcoming earnings releases will be crucial in identifying which companies can justify their current valuations and which might benefit from a new phase of market rotation.
How do you explain the sharp fall in the price of gold in the first half of the year, even though the environment remains characterised by significant geopolitical tensions and persistent inflation?
This is mainly due to technical factors, namely the rise in real interest rates, the strengthening of the dollar and profit-taking following an exceptional rally at the start of the year.
Sales by some central banks, notably in Turkey and India, also contributed to this consolidation phase. Margin calls on some investors also led to a reduction in positions in assets that had risen sharply.
However, this correction does not call into question the structural factors favouring gold in the medium and long term. Concerns over rising budget deficits, as well as central banks’ growing desire to diversify their foreign exchange reserves, remain significant supports.
A recent survey by the World Gold Council also indicated that a very large majority of the central banks surveyed anticipated an increase in their gold reserves over the next twelve months.
We therefore view this decline more as a technical correction. It may even present attractive entry points for investors with a long-term horizon.
What position do you recommend taking on corporate bonds at present?
Generally speaking, we believe that current interest rate and credit spread levels make the traditional bond market less attractive.
In the Swiss market, the yields offered by investment-grade bonds denominated in CHF remain relatively limited. The high-yield segment offers higher returns, but we do not always consider the returns sufficient given the risk involved.
We therefore favour certain alternative strategies, notably alternative credit solutions such as Cat bonds, which can offer more attractive sources of income than traditional bonds.
The Swiss investor’s perspective must also be taken into account. An investor seeking returns in CHF must factor in the cost of hedging currency risk. Currently, the cost of hedging against the US dollar exceeds 4 per cent over one year, whilst that against the euro stands at around 2.5 per cent, which significantly reduces the apparent attractiveness of foreign bonds.
I believe the bond market is now entering a phase of normalisation in which selection and active management are becoming essential. The massive financing requirements linked to artificial intelligence, infrastructure and the energy transition will almost certainly create new opportunities, but these will still need to be analysed with great discipline.