Key insights
- A strategist highlights the powerful AI trade as a dominant market force, despite hawkish Fed policy and a strengthening US dollar posing potential risks. The market is absorbing significant debt and equity issuance for AI build-outs, even as borrowing costs rise. While the flattening yield curve and increased debt issuance could typically signal volatility, unprecedented liquidity and strong earnings, particularly in semiconductors, are currently supporting stock prices. This creates a dynamic tension between tightening monetary conditions and strong demand for AI-related investments.
Manulife John Hancock Investments co-chief investment strategist Matt Miskin shares his take on the recent market (^DJI, ^IXIC, ^GSPC) rally.
usually when a Federal Reserve comes in and is pretty hawkish, that gets the market's attention. But not all markets are taking this the same way. The US dollar is really starting to advance and in our view, that is a potential risk. Um that is also a thing that can change cross asset dynamics pretty quickly here. The curve is also flattening, so the two 10 part of the curve really flattened. that could almost go inverted again.
Um, so that's something we're watching. But in terms of stocks, as long as they have this AI trade underneath them, it is the most powerful market force, I think I've ever seen in my career.
Now that we're seeing these companies issuing more debt to pay for the AI build out, SpaceX just doing a bond offering, Nvidia doing a bond offering, will higher rates have more of an effect there?
They should. Um, this is the it's like a two massive waves colliding. So you've got all these companies issuing a massive amount of equity, massive amount of debt as the Federal Reserve is raising rates, raising borrowing cost, and trying to pull away liquidity.
So, these two things are at odds with each other. Typically that does create volatility, but right now, the amount of liquidity that is coming into this market is basically unprecedented given the size of stocks relative to the economy, relative to everything else. So, you know, we were really on edge looking at these IPOs and thinking there might not be a enough liquidity to take all this new IPO issuance in. The last couple weeks have been remarkable how well they've been handled. Um, now there are some other things in the background that could be also helping this. Uh, the Straight of Hormuz opening or at least oil prices coming down. Um, and then you've got these really strong earnings and strong exports from South Korea in terms of semiconductor demand. Um, so it is still a market that is in love with risk, love with AI, um, and really turning away from the potential risk of a tighter Fed.