Insatiable appetite for AI and Gold

With little surprise, major US indices went on to print fresh all-time highs yesterday, again fueled by technology and AI. In fresh news, Elon Musk’s xAI secured $20 billion in funding — including from Nvidia, SoftBank bought ABB’s robotics division, intensifying its bet on what it calls “Physical AI,” which it believes will be the next big thing within artificial intelligence. Investors loved it — to say the least — with SoftBank soaring 10% in Tokyo, helping the Nikkei remain bid near record highs.

Also, earlier this week, Dell doubled its growth estimates for sales and profit for the coming two years, saying they were “wrong about how big [they] thought the AI market was two years ago” and that “it’s nothing but bigger.” That sentiment was echoed by JPMorgan CEO Jamie Dimon, who acknowledged that demand for AI has turned out to be far stronger than many anticipated. He revealed that JPMorgan is now spending about USD 2 billion per year on AI initiatives — and, strikingly, those investments are already being offset by equivalent cost savings.

So again, I won’t defend that the market is not in a bubble — but I don’t see where the reports that AI is not worth investing in are coming from. Anyway, the AI rally continues full speed in the US, with Nvidia up 2% yesterday, Tesla — which wants to internalize xAI — gaining 1.3%, Dell jumping 9%, and the Nasdaq 100 pushing to a fresh record high above 25,000.

All that came as the FOMC minutes hinted at further rate cuts down the road — but with many officials still worried about inflation risks. That means any flare-up in inflation data could quickly reverse the Federal Reserve’s (Fed) easing path. The good news is: no major data are being released right now as the US government remains shut. The 2-year yield, which best captures Fed expectations, remains steady just below 3.60%, while the 10-year yield is holding sideways after a $39 billion debt sale that fell just short of expectations.

In FX, the US Dollar is softer this morning after having bounced to a 2-month high on weaker appetite for the euro and yen. The kiwi rebounded after hitting its lowest level since April following a surprise 50 bp cut from the Reserve Bank of New Zealand (RBNZ), which left the door open for further easing, arguing that the economy’s weakness had become too pronounced to wait, while inflation is showing signs of easing. Poland also unexpectedly cut rates, citing easing inflation pressures, while the Bank of England (BoE) warned that stretched valuations for AI companies and growing concerns about the Fed’s independence increased the risk of a “sharp market correction” that could spill over into global markets. Funny enough, the UK has such limited exposure to AI — and such pressing fiscal issues — that the warning went largely unheard by investors. Sterling remains very much unloved heading into the Autumn Budget. Even though French political shenanigans have capped the upside in the EURGBP since late September, the outlook remains more supportive for continental Europe than for the UK, where sluggish growth, persistent fiscal pressures and a hesitant Bank of England continue to weigh on sentiment.

One place where there’s no hesitation is gold. The bullion finally soared past the $4,000 per ounce mark yesterday on the back of diminished appetite for traditional currencies including the euro, dollar, sterling and yen — alongside strong central bank buying and renewed uncertainty around the US government shutdown. A question that constantly comes up is whether gold has more room to run. Unlike equities, we don’t have valuation ratios to judge whether gold has become “too expensive.” The yellow metal also enjoys solid retail demand, particularly during China’s Golden Week and India’s wedding season. But the physical leg is not the major explanation. Gold rallies because investors believe it has value. How much value? As much as people think it has. If one Bitcoin is trading above $120,000, gold surely has endless upside potential, as well. So yes, even with record-high prices, the medium-term outlook for bullion remains positive. Many investors already eye a move toward $5,000 and above.

For the rest of the week, and in the absence of US economic data, investors will focus on the first batch of US earnings, with results from Delta, Pepsi, Levi’s and BlackRock due to be released. The spotlight will be on how firms are navigating a still-resilient economy, sticky costs and shifting rate expectations all of which could set the tone heading into the heavier part of the reporting season next week. Earnings expectations have improved over recent weeks, with S&P 500 companies expected to post 6.3% revenue growth and nearly 8% profit growth in Q3. Across sectors, technology stocks will continue to do the heavy lifting with a 21% profit surge expected, thanks to AI-related demand. Utilities and financials are seen rising 17.5% and 11% respectively, while energy and consumer staples are projected to see 3% declines in profits due to trade tensions and falling energy prices. Let’s see what the companies have to say!