AI earnings defend US shares, however bond dangers rise: Jefferies’ Wooden

Mumbai: US equities have largely shrugged off rising bond yields and geopolitical tensions to this point this yr, helped by sturdy earnings development fuelled by the AI capital expenditure cycle, mentioned Jefferies international fairness strategist Chris Wooden. Nonetheless, the bond market is now reaching ranges the place the dangers to equities are rising, most significantly with the US Federal Reserve turning extra hawkish, he mentioned in his publication Greed & Worry.

The yield on the US ten-year and 30-year authorities bonds hit 5.34% and 5.69% respectively to their highest ranges since April 2002 and Could 2002, partly contributing to final week’s slide in Indian equities, which posted their eighth straight week of losses until Friday.

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Whereas US shares have traditionally tended to carry out poorly within the run-up to mid-term elections earlier than rallying thereafter, that sample has not performed out this yr, in keeping with Wooden.

“The inventory market has traditionally performed comparatively badly going into the mid-terms whereas that has not been the case to this point this yr, primarily due to the stellar earnings development pushed by the extremely earnings-accretive AI capex cycle,” he mentioned.

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In response to Wooden, traders are dealing with three points: the primary, and maybe most vital for equities, is the period of the AI capex cycle and whether or not there might be satisfactory returns from the large spending.

He mentioned the second concern is the renewed realisation that G7 authorities bonds are in a structural bear market, whereas the third is the state of play in shifting geopolitics.