The AI-ffect Of The AI Mania

On the macro front, new data out last week showed Japan’s economy officially exited recession after GDP expanded by more than expected during the first three months of the year. The EU, on the other hand, got some mixed news last week, with the European Commission raising both its inflation and growth outlook for the bloc. Over in the equity world, the frenzy around AI shows no signs of letting up. Mentions of AI during earnings calls have surged, and investors are scrambling to ride the rapidly growing trend. Even billionaire investing titans have been loading up on AI stocks recently. In fact, so strong is the investing hype around AI that without it, US stocks would actually be down for the year, according to new research by Societe Generale. Finally, Newmont sealed a deal last Monday to acquire Australian competitor Newcrest Mining, consolidating Newmont's position as the world’s biggest gold producer at a time when bullion is trading near a record high. Find out more in this week’s review.

Macro

Citing the strength of underlying price pressures, the European Commission lifted its projections for consumer-price growth in the bloc to 5.8% this year and 2.8% in 2024 (from 5.6% and 2.5% respectively). That means inflation is expected to stay above the European Central Bank's target of 2% until at least 2025, despite policymakers having increased interest rates by 375 basis points over the past ten months and signaling further hikes.

The growth forecasts are more upbeat compared to the previously pessimistic outlook from the commission. It now expects the bloc's economy to grow by 1.1% this year and 1.6% in 2025 (up from previous forecasts of 0.9% and 1.5% respectively). The upgrade comes down to three factors, according to a statement by the commission. First, the determined efforts made by governments to bolster the region's energy security, effectively helping the bloc evade an energy crisis. Second, the resilience of the labor market. And third, the easing of supply constraints that had previously posed challenges to growth. Yet despite all this, the commission warned that the improved growth outlook shouldn’t be a cause for complacency.

Elsewhere, new data out last week showed Japan’s economy expanded at a faster pace than expected last quarter, as a further loosening of pandemic restrictions boosted spending by consumers and businesses. The world's third-biggest economy grew at an annualized rate of 1.6% during the first quarter – far exceeding forecasts for a 0.7% gain and marking the first rise in three quarters. That means Japan's economy has officially emerged from recession, and to celebrate, cheery investors sent the country’s key stock market index (the Topix) to a 33-year high.

Stocks

Interest in AI has skyrocketed since OpenAI’s ChatGPT took the world by storm late last year, with investors tripping over themselves to capitalize on the fast-growing trend. Corporate leaders, meanwhile, are scrambling to prove to investors that they’re at the forefront of using the technology to drive revenue growth, improve operational efficiency, and more. That explains why references to AI and related terms during companies’ first-quarter earnings calls more than doubled from a year ago. (Note that in the graph below, Q2 refers to the second calendar quarter of 2023, which is when earnings calls for the first quarter of 2023 are being held).

In fact, so strong is the investing hype around AI that without it, US stocks would actually be down for the year. That’s according to a new analysis by Societe Generale, which argues that the AI frenzy has been responsible for all of the S&P 500’s year-to-date rally. The investment bank's research shows that without the gains of “AI boom stocks”, the S&P 500 would be down 2% this year, rather than up 8%.

That’s not entirely surprising when you consider that stocks of companies perceived as AI winners – think Nvidia, Microsoft, Alphabet, and so on – have been on an absolute tear recently. Nvidia's stock price has more than doubled so far this year, while shares in Microsoft – which invested $10 billion in OpenAI back in January – have surged by almost 30%, leaving them not too far off from their all-time high. Alphabet, meanwhile, saw its shares spike by more than 10% during the second week of May after it announced plans to integrate AI into Google search and a whole host of other products.

Even billionaire investing titans like Stanley Druckenmiller and David Tepper have been loading up on AI stocks during the first quarter, according to the most recent 13F filings out last week. Druckenmiller’s Duquesne Family Office increased its stake in Nvidia by more than 208,000 shares. It also added a large new position in Microsoft, which now makes up 9% of the firm’s roughly $2.3 billion US equities portfolio. Tepper’s Appaloosa Management added a new position in Nvidia, buying 150,000 shares with a market value of about $42 million. The firm also bought 500,000 new shares of Cathie Wood’s ARK Innovation ETF, which invests in companies that create disruptive technologies such as AI.

Finally, to round up all the news on AI, analysts at Goldman Sachs said in a research note last week that the booming technology has the biggest potential to boost long-term US profit margins. More specifically, the researchers said that AI can boost net profit margins by nearly 400 basis points over a decade, based on the historical relationship between productivity growth and corporate profitability. This contrasts with other mounting headwinds, such as a potential recession, high interest rates, elevated inflation, and bloated inventory levels, all of which make near-term margin expansion unlikely, they said.

Commodities

Gold miner Newmont sealed a deal last Monday to acquire Australian competitor Newcrest Mining for $19.2 billion. That would mark the sector’s largest deal to date, surpassing Newmont’s purchase of rival Goldcorp in 2019. The acquisition, which has been approved by Newcrest's board but is still awaiting regulatory approval, would consolidate Newmont's position as the world’s biggest gold producer, further strengthening its grip on the sector at a time when bullion is trading near a record high. After all, turmoil in the banking sector, a dovish stance from the Fed, and uncertainty around the US debt ceiling are all boosting gold’s safe haven status.

The acquisition is part of a broader trend of consolidation in the global mining industry. Many bullion producers worldwide are facing the prospect of stagnating output due to harder-to-mine deposits and rising input costs. That’s seen as a catalyst for more mergers and acquisitions (M&A), with companies looking to increase their size to boost volumes and improve efficiencies. What’s more, many gold miners are looking to M&A to increase their exposure to critical minerals needed for the energy transition. Newmont’s acquisition, for example, not only increases its exposure to gold, but also to copper – a metal expected to see a surge in demand due to the transition away from fossil fuels.

This week

• Monday: Eurozone consumer confidence (May). Earnings: Zoom Video Communications.
• Tuesday: Global PMIs (May), US new home sales (April). Earnings: Intuit, Palo Alto Networks.
• Wednesday: UK inflation (April), minutes from the Fed’s last meeting. Earnings: Xpeng, Nvidia, Snowflake.
• Thursday: US GDP (Q1), German GDP (Q1). Earnings: Medtronic, Costco.
• Friday: Japanese inflation (May), UK retail sales (April).