News & Insight

Our macroeconomic outlook is by now well-rehearsed: high interest rates tame inflation only by bearing down on economic activity. As the economy slows, corporate profitability declines, workers are laid off and unemployment rises.

In this update we discuss the narrow subset of stocks that have driven markets higher, such as those at the centre of the AI story, which appear to promise strong growth regardless of the economic backdrop. We follow this by taking a look at Nvidia, the flagship of the AI hysteria, to highlight the risk that such growth may not be as enduring as current valuations demand. We begin, however, with a brief update on economic developments.

With the inflationary threat widely thought to have been defeated, stock markets have enjoyed a broad-based rally fuelled by hopes that central banks will soon cut interest rates. This reflects investors’ increasing optimism in the likelihood of a soft economic landing, in which economic output continues to grow apace while inflation subsides. In this note we look at this historically rare pairing.

There are some uncomfortable parallels between the state of economies and markets today and previous challenging periods in recent financial market history. These have provided material for eye-catching newspaper articles in recent weeks including The Telegraph’s ‘Why Britain is on the verge of a cataclysmic financial crisis’.

When we last wrote, in May, we suggested markets were travelling much too hopefully, ignoring the likely consequences of an historically aggressive series of interest rate hikes. These extraordinary gains have been fuelled by optimism that, having raised interest rates forcefully in the face of high inflation, the US Federal Reserve may now be on course to engineer a much hoped for ‘soft landing’.