- US consumer price index rose to 2.9% year-on-year in August.
- The core reading stripping out volatile food and fuel prices held steady at 3.1%.
- The number of jobless claims jumped to 263,000 keeping interest rate cut expectations on track.
- Hopes for an easing of monetary policy has kept fire under stocks, with a fresh rally on the cards.
- Huge jump in tech valuations, fuelled by bullish AI demand forecasts, raise warnings about an AI bubble.
- Some parallels to the dot.com bubble which peaked 25 years ago this year, but opportunities remain.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The bull run on Wall Street has been rampaging ahead, fuelled by AI enthusiasm and interest rate cut hopes. There was nothing to seriously upset the beasts of optimism in the inflation numbers. Although the CPI rate ticked up over the month to 2.9%, which was slightly higher than expected, the core rate, which strips out volatile food and fuel prices, remained stable. The jump in unemployment in the US has kept the fire lit under interest rate cut hopes, given that policymakers look at the risks further down the road. The weakening labour market is a warning light about a slowing US economy, and it will raise fears about stagflation settling in. However right now investors are taking a glass half full approach, enthused by the prospect of lower borrowing costs.
CPI readings set to power stocks higher
The inflation and jobs readings look set to keep fire in the belly of the record stock run. The bulls still have energy, powered by high expectations of the AI era. Oracle looks set to lose a small bit of ground but it’s a tiny dent after a dizzying jump in valuation. It was powered by a mega deal with OpenAI, and super-positive outlook for its cloud business. As it scaled fresh heights it pulled up other stocks in the semi-conductor sector, with optimism riding high about AI acceleration. Fired up by future visions of how artificial intelligence will shape our lives, investors have shown huge enthusiasm for tech firms with their fingers in all sorts of AI pies. The future trajectory of demand for AI tools and services is hard to map, yet these valuations rely on eye-watering sums to continue to be poured into the sector at a rapid click, far into the horizon. So, it’s not surprising fears are growing that an AI bubble has formed which risks popping down the line.
AI hyper-enthusiasm comes 25 years after Dot.Com bubble
These worries come 25years on from peak dot.com, when investors were caught up in a different wave of tech speculation. In the Dot.com universe, hundreds of companies were shining bright, as hyper-enthusiasm for the digital world took hold of market sentiment. Low interest rates, and frenzied interest in companies launching into the new online arena meant capital flowed thick and fast to startups making big promises. When interest rates started to ratchet up and funding dried up the dot.com party ended in dramatic fashion. The big bust when it came shattered confidence and rocked the foundations of the online world, as irrational exuberance blew up in investors’ faces. Failures littered the tech landscape including online shopping companies Webvan.com, Pets.com and Boo.com, communications firm WorldCom and content network Broadland Sports. Survivors saw their share prices battered. Amazon shares soared in value in 1999, before collapsing in spectacular fashion. Shares fell 90% as the company, then known as an online bookseller, was hit by the crisis of confidence as the noughties era began.
But as the dot.com boom and bust tells us, there will be survivors of any potential storm on financial markets. Not all tech companies are created equally, and some will not live up to the AI hype. Others have opportunity stamped into their DNA and will be fit enough to weather a sudden drop in confidence. There may still be casualties ahead when a market trigger sparks the next loss of confidence. But the current group of market leaders appear significantly stronger operationally and financially than the bubble stocks of the dotcom era. It’s also worth bearing in mind Amazon’s subsequent trajectory. The stock may have fallen by 90% as the dot.com era crashed and burned, but it’s risen since in spectacular fashion with the online bookstore becoming not just an e-commerce behemoth but a giant global technology innovator and enabler. A quarter of a century ago it was hard to foresee just how much of an impact the internet would have over all our lives. As with any rapidly developing technology, what may seem like skyrocketing prices can in hindsight be just another small step on a much bigger journey. But the rules of the AI game are evolving so quickly that some of the giants of the future may still be under the radar, with their innovations just waiting to be discovered.’’
