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Autumn turbulence
High oil prices, France’s debt burden, the US midterm elections and a host of questions surrounding artificial intelligence kept investors on their toes in October. Broad stock market indices were relatively steady, but some of the hottest stocks in the AI boom saw dramatic swings. Historically, stock markets have performed strongly in the months following US midterm elections with political uncertainty easing. We therefore maintain our overweight position in equities despite the autumn turbulence.
Sharp swings in technology stocks
The global technology index reached an all-time high in early October, but has since fallen by around 10%. Familiar concerns, including fears of excessive investment and disappointing returns on that investment, have resurfaced. This has pushed share prices down, particularly in the semiconductor sector, where the outlook depends heavily on how quickly AI investment grows.
The companies themselves remain very upbeat and expect the AI boom to continue to surge over the next few years. Korean memory chip manufacturer SK Hynix said its order book is full until 2029 and expected the chip shortage to last until 2030. Its rival Samsung, meanwhile, reported a third-quarter operating profit of USD 80 billion, a new world record for a technology company. Both companies’ share prices have dropped sharply from their peaks, and based on the current earnings forecasts for the next 12 months, their shares are trading at P/E ratios of around 3x. Such a low level will not persist, so either earnings forecasts will soon be cut substantially or share prices will rise significantly.
There have also been sharp share price movements outside the semiconductor sector. Higher interest rates and wider credit spreads have increased borrowing costs, creating challenges for the most heavily indebted companies. In recent weeks, markets have focused particularly on so-called neocloud companies, which build data centres and rent out their computing capacity to customers. These companies typically carry very high levels of debt. For example, the yield on CoreWeave’s bond maturing in five years has already risen to 15%. The AI boom still offers investors excellent opportunities, but not every company in the sector will emerge a winner.
US midterms draw closer
Investors are also weighing up the US midterm elections on 3 November. Alongside the rising cost of living, data centres have become a major election issue. Growing numbers of people are concerned about the impact of the data centre boom on water consumption, electricity prices and local landscapes. Reports of cyberattacks carried out by AI agents have also prompted many to question whether AI needs tighter regulation. Politicians, too, are having to take a stance on these issues, with critical voices considerably more common within the Democratic Party.
If the Democrats win a majority in both houses of Congress, they may very well seek to tighten AI regulation. However, the president has the power to veto legislation, so these efforts may not lead to changes. The elections for state governors held alongside the midterms will be particularly important for the data centre construction boom, as many states are considering restrictions on new projects. Investors are paying special attention to Texas, where the race for governor is shaping up to be tight and new projects have been temporarily put on hold.
With data centres attracting considerable media attention, the approaching midterms may have contributed to volatility in the technology sector. Historically, stock markets have often been somewhat subdued ahead of midterm elections, but have performed much more strongly in the months afterwards. We expect the AI boom to continue regardless of the election result. Ultimately however, the most important decisions about AI development are made by businesses, not politicians.
Central banks in wait-and-see mode
The European Central Bank (ECB) and the US Federal Reserve (Fed) left their policy rates unchanged at their late-October meetings. However, rate hikes could resume in December if energy prices remain high. Nordea’s economists expect the ECB to raise its policy rate twice more during this hiking cycle.
The price of Brent oil continued to rise in October, even though crude oil shipments from the Persian Gulf have returned to roughly their pre-crisis levels. However, oil supply still falls slightly short of demand and inventories are low, so prices are unlikely to fall significantly before a lasting peace is reached. The most severe supply constraints affect fuels such as diesel, as some refining capacity has been lost in both the Persian Gulf and Russia. Inflation risks therefore remain elevated: the longer energy prices stay high, the more likely businesses are to raise the prices of their end products.
