Although the focus is the impact of AI on the U.S. economy and markets, the AI theme is, of course, a global phenomenon. Per our Biweekly Chart in Focus, if looking at Taiwanese exports as a proxy for global AI and technology demand, though annual growth has slowed it remains at a very healthy 39.2% on a YoY basis as of July. Nasdaq-100 and semiconductor YoY returns similarly remain at elevated levels despite having slowed as momentum cooled.
From a bottom-up perspective, Q2 earnings season helped allay AI spending concerns in the near-term. However, just as importantly, earnings helped to underpin a broadening of equity returns as U.S. equities hit new highs—the median Russell 3000 EPS growth rate is 15% in Q2 YoY, the highest since Q3 2021.
Also helping risk assets over the past two weeks at a macro level were softer July U.S. CPI and PPI reports which scaled back the market pricing of Federal Reserve rate hikes. As of August 17th, there is an 89% chance of a 25 basis point hike by year’s end versus at least one 25 bp hike priced in only a week earlier. While a near-term relief for markets, investors are still contending with multi-year highs in U.S. Treasury yields as the 10-year is at 4.70% and global government bond yields also remain elevated.
As the markets move past Q2 earnings, summer winds down, and the calendar turns to September, based on history, we suspect that the market narrative will turn to the U.S. midterm elections in early November. Historically, per Goldman Sachs, market volatility ramps up heading into midterm elections. Yet, these elections tend to be more noise than anything as the S&P 500 typically averages a total return of 14.1% over the six months following midterm elections, since 1970, according to BlackRock.
