The AI theme is supporting the markets
After last week’s brief market volatility, triggered by the Federal Reserve’s 0.25 percentage point rate hike and hawkish messaging, stock markets have shown remarkable resilience. Investor attention has shifted back to the market's strongest performers, specifically the AI and semiconductor sectors, which have once again propelled US indices close to all-time highs. Meanwhile, falling oil prices and stabilizing conditions in the bond market are providing the stock market with some much-needed breathing room.
AI and semiconductors at the forefront again
Looking at the various sectors, capital has flowed back particularly into the technology sector (XLK) and semiconductors (SMH). Recent gains in the technology sector have been supported by semiconductor manufacturing companies, such as Nvidia, AMD, and many others, which have performed wellover the past week and the beginning of this week.
Compared to many other sectors, the difference is clear. Many other sectors (such as XLE, XLU, XLB, XLP) are actually in a clear downtrend. This means that the indices are currently largely driven by the technology and semiconductor sectors alone.
However, elevated interest rates could increase financing costs for companies investing heavily in data centres and artificial intelligence. Conversely, many companies in the sector have virtually full order books, and the outlook for the remainder of the year and beyond is positive. Consequently, companies that have underperformed relative to industry leaders may find themselves under particular pressure in the current higher interest rate environment.
XLK, 5-year chart
XLK, 1-year chart
SMH, 5-year chart
SMH, 1-year chart
The pullback in oil prices is boosting stocks.
Another key factor supporting the stock market is the drop in crude oil prices. Brent crude, which had previously traded at around $110 per barrel, has fallen to closer to $100. This has given the stock market with at least a temporary reprieve while also easing inflation expectations for the autumn.
Falling energy prices play a particularly significant role in industry-heavy Europe. However, a sharp rise in energy prices could quickly have a negative impact on global stock markets.
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BRENT, 5-year chart
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S&P 500 and NASDAQ surging
In the United States, the S&P 500 and NASDAQ indices have performed strongly following the Fed's interest rate decision and press conference last week. Both indices have risen close to their previous all-time highs.
The key driving forces behind this have been, in particular, the strong upward momentum in the technology and semiconductor sectors, the drop in oil prices, and a moderate decline and subsequent stabilization of bond yields. If the upward momentum in these sectors begins to fade, or if energy prices and interest rates turn upward again, the indices could face significant headwinds.
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S&P 500, 5-year chart
S&P 500, 1-year chart
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Summary
Following concerns over interest rates, investor confidence in the staying power of the AI theme has turned the stock market’s direction around. While the tight interest rate stance of central banks and oil prices hovering near $100 conitnue to pose macroeconomic risks present, the earnings power of tech giants and investments in AI are currently acting as the market's strongest drivers.
Indicators shown on the charts:
- SMA200: 200-Day Moving Average, red.
- SMA50: 50-Day Moving Average, blue.
- EMA25: 25-Day Exponential Moving Average, yellow.
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