Markets are navigating a push-and-pull between strong earnings and AI-driven optimism and the headwinds of geopolitical risk, rising inflation, and higher interest rates. While global growth is slowing, it remains resilient, though pressured by higher energy costs. Renewed inflation concerns have shifted expectations toward possible rate hikes, lifting bond yields, and although equities continue to hold up, investors are increasingly questioning the durability of AI-driven gains. Overall, sentiment remains cautiously optimistic, with a growing emphasis on selectivity, diversification, and risk management.

TRANSCRIPT:

Hi everyone, my name is Aya Yoshioka, Director and Senior Investment Strategist at Wealth Enhancement. Welcome to this week’s Market Movers video, where we break down the key developments across markets and the economy. Markets continue to be pulled in two very different directions.

On one hand, we’ve had strong corporate earnings and AI driven optimism. On the other hand, we continue to have geopolitical tensions, a resurgence in inflation and higher interest rates. So the big question remains, with higher inflation and higher interest rates, should we be concerned about the impact these may have to equity markets? Well, before we answer that, let’s talk about what we’re seeing from a global economic growth perspective. Growth is still holding up, but there is some evidence of a slowdown.

We’ve seen some purchasing manufacturing surveys across Australia and Europe pointing to intensifying strain on manufacturing and services with factory activity either slowing down or contracting across most major economies.

Higher energy prices are a tax on the global economy. And we also keep seeing the impact that higher energy prices are having on inflation. Markets are now concerned that we may get a second wave of inflation pressure, and we saw inflation break even rates climb to their highest level in three years.

This brings us to interest rates. Markets have undergone a meaningful shift in just the last few weeks. Earlier this year, the expectations were for a couple of Fed rate cuts. Well now, markets are pricing in the possibility of another rate hike. Especially as markets parse through Fed minutes this week, a majority of Fed officials saw a rate hike as likely warranted if inflation persists.

In Europe, central bank members warn that a hike in June is quite likely if the war is not resolved. Thus, the 10-year treasury yield which began the month at 4.35% moved up to around 4.65%, a multi year high. We also saw 10-year gilts in the UK near 5% and Japan’s 10-year bond was a little over 2.75% percent while their 30-year bond topped 4.2%.

Now let’s contrast all of this with corporate earnings, which have actually been quite strong as I mentioned.

And while we have seen equity markets broaden out, we’ve seen merchant markets and international developed markets do well this year, many of these moves are tied to one theme that we consistently hear about, which is AI.

We’ve even heard from Nvidia this week, which had a very strong run into their earnings release, but the stock was a little changed after they reported as analysts remained broadly positive, but some investors are starting to get a little concerned about the durability of their growth, especially as AI moves beyond just training for these models and increasingly focuses on what many are calling inference.

We’ve seen broad market moves as companies delivered strong earnings, and we’ve also have potentially some big catalysts as we go into the summer with some big IPOs on the horizon. We have SpaceX, OpenAI and likely Anthropic, all likely to come to the market in the coming months.

Will there be appetite to buy these stocks? Where will investors source funds in order to buy these stocks? Will they be taking profits from the existing winners? Unfortunately, we won’t know the answers to these questions until these companies come to market. But these are questions that we are asking our committee.

Investor sentiment has been really whipsawed by headlines related to the Strait of Hormuz, earnings and more. And investor sentiment yet still remains relatively optimistic, but increasingly cautious. Across asset classes, the message is consistent. Markets are repricing for higher inflation and tighter financial conditions.

So where does that leave us? Well, the market environment is becoming more balanced, less about broad upside and more about selectivity, diversification and risk management.

With that, I hope you all enjoy the long Memorial Day weekend. Thanks again for tuning in and we’ll see you again next week.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor’s specific circumstances. Investing involves risk, including possible loss of principal.

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