Jeremy Richardson identifies AI inference driving market gains, early signs of broader economic relief from moderating oil prices, and lingering geopolitical risks that could derail positive momentum.
Highlights:
AI inference is taking the equity market by storm, with semiconductor and cloud infrastructure companies experiencing over 60% EPS growth, driven by corporate demand. This remains a narrow market segment, with consumer adoption yet to materialize.
The bottom leg of the K is beginning to see some relief as oil prices moderate back to pre-war levels, replenishing household pockets. Industrial companies are seeing cyclical upturn, though it's unclear if this inventory replenishment will sustain.
While energy concerns have eased, ongoing geopolitical tensions pose an unwelcome risk that could reverse positive momentum in the broader economy.
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Hello. This is Jeremy Richardson from the RBC Global Equity team here with another update. Three things to discuss. The first of which is how AI inference is taking the equity market by storm, with over 60% EPS growth being expected from a narrow group of companies, mostly involved in actually selling to cloud computing companies, the things they need to run their data centres. These are semiconductor chips, memory chips, and a lot of the other paraphernalia you need to actually get your data centre to operate.
This is being driven by a huge increase in demand for AI inference. This is the usage of AI being driven in particular by corporate users who are using AI for coding. We have not yet seen a consumer element really begin to pick up the baton here. That may be in front of us, but for the moment, at least, it's a narrow portion of the market which is leading EPS estimates higher, and which is capturing a lot of investors' imagination.
The second thing, though, to note is that we're also seeing just the market beginning to experiment with a little bit of broadening out. I have spoken previously about the K-shaped market and a K-shaped economy. It's the bottom leg of the K which may be beginning to see some relief. The fact that oil prices have moderated and now come back down to pre-war levels is putting some dollars back into the pockets of households.
We're beginning to see just some signs of a cyclical upturn, not so much driven by the consumer, but driven by businesses, industrial companies actually producing things which are then being sold onto the consumer. Time will tell whether this is simply a replenishment of inventory or whether this will be sustained, but it is, I think, from investors' point of view, an incremental positive if it means that we see a broader number of companies actually begin to outperform.
The third and final thing to mention, though, is geopolitics. Now, most recently, this has been a marginal improvement because we've seen stress over the energy shortage actually diminish. As I say, energy price is now back to pre-war levels. The recent news and headlines are a reminder that nothing can be taken for granted. This actually is an unwelcome delta that investors need to be paying attention to because it has the power to come back and actually give a negative surprise, and actually may snuff out some of that more positive momentum we're seeing in terms of the bottom end of the K-shaped economy. I hope it's been of interest, and I look forward to catching up with you again soon.
