Jean Boivin – Head of BlackRock Investment Institute together with Beata Harasim – Senior Investment Strategist and Carolina Martinez Arevalo – Portfolio Strategist, all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
AI big spenders
Investors have started to worry about tech companies spending big on artificial intelligence. We focus on the broader story and stay overweight the AI theme.
Market backdrop
U.S. stocks have climbed back near all-time highs. Resilient U.S. growth calls into question the scale of Federal Reserve rate cuts markets have priced.
Week ahead
This week’s U.S. payrolls report should show ongoing job gains even with the rise in unemployment. We don’t think such job gains support recession worries.
Investors are debating whether future revenues for top tech and cloud computing firms could justify billions of dollars of capital spending being poured into artificial intelligence (AI). We think it’s key to distinguish between the individual companies and broader economy when gauging the impact. We’re overweight the AI theme and see winners along the AI supply chain. Yet we eye signposts for changing our view, including stalling revenue growth or sluggish AI adoption.
In recent months, market buzz over the benefits of AI has flipped to worries that the companies investing big in it may not see the benefits so quickly. We assessed this sudden shift in sentiment with our portfolio managers. Overall capital spending by top tech and cloud players has surged in recent years, especially in energy-hungry data centers, as they race to build out AI. See the chart. Past investment ultimately led to a boost in revenue, helping deliver a return on investment, data from LSEG show. Yet some recent research has questioned if the revenues from AI alone will eventually justify this wave of capital spending on it. When assessing AI capex by individual companies, investors must consider if they are making the best use of their balance sheets and capital. But for the economy overall, we judge AI investment by the major revenue that AI could generate across sectors.
Investment in AI could compare to capital spending on past tech innovations, like cloud computing. Yet it’s possible that shareholders may not see further AI investment as the best use of corporate balance sheets. We see a disconnect between the short-term lens of some investors and the long-term visions of tech and cloud service providers. That divergence has spurred jitters among investors – but we think patience is needed. Some big spenders on AI have earmarked capex for building new data centers and exponentially multiplying processing power for AI. Such plans take years – not quarters – to complete. So it may take some time for revenues to fully realize AI capital spending. Some tech companies are already reporting increasing revenues from the roll out of AI-related products.
Broad-based AI demand
We see room for overall AI capex to spur some of the waves of transformation driven by mega forces, or structural forces shaping returns. Nvidia’s Q2 revenues doubled from a year ago, showing that AI capex is sizable and ongoing. Nvidia’s results highlight how the AI buildout is broadening: more than half its AI revenues came from non-tech sectors. We track a few signposts to assess our upbeat view on the AI theme. First, we look for signs of stalling revenue growth at top AI companies, adding to the importance of each earnings season. Second, we gauge changes in still-low AI adoption beyond the tech sector. Third, we eye any U.S. growth downturn that could spur big tech companies to curb spending.
We use our three-phase roadmap to track the economic and market impact of AI. The first phase – the buildout – is unfolding now as large tech companies race to invest in data centers. Early winners in this phase include those big spenders and chip producers. We also see opportunities in firms supplying key inputs like energy, utilities and real estate. In the second phase, we think AI adoption will expand to sectors beyond tech such as healthcare and financials. This could result in a third phase of broad productivity gains, but the size and impact is uncertain. Our coming research will explore this in more detail.
Our bottom line
Investors are debating the implications of the AI capex boom. Some investors have cut positions in tech in recent months, implying room to rebuild holdings. We stay overweight the AI theme but eye signposts to change our view.
Market backdrop
U.S. stocks have climbed back near all-time highs. The AI trade regained its footing after the volatility in July and early August, even as Nvidia’s shares stumbled on profit taking after its Q2 earnings beat expectations. Broadening Q2 corporate earnings growth, coupled with last week’s upbeat jobless claims and GDP data, show U.S. economic growth is holding up – a positive for risk assets. We think the Federal Reserve is unlikely to cut rates as sharply as markets are pricing in.
U.S. payrolls for August are in focus this week. At the Jackson Hole symposium, Federal Reserve Chair Jerome Powell noted the central bank is now focused more on any softening in the labor market. A further rise in the unemployment rate helped stoke recession fears last month. Yet this was caused by an immigration surge increasing labor supply, not layoffs. We expect this week’s data to show signs of job growth holding up, alleviating lingering growth concerns.
Week Ahead
Sept. 4: China Caixin services PMI; U.S. job openings; U.S. trade data
Sept. 5: U.S. ISM services PMI
Sept. 6: U.S. payrolls; euro area employment
BlackRock’s Key risks & Disclaimers:
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of 4th September, 2024 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.
Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.
MeDirect Disclaimers:
This information has been accurately reproduced, as received from BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
The financial instruments discussed in the document is intended for retail clients however, it may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.
