From the studio

Podcast: What the US-China AI race means for energy markets (9 min)
Podcast: CIO's Kiran Ganesh on AI FOMO and valuation concerns on Apple, Spotify (18 min)
Video: Our new AI capex forecast and its implications for the AI story (4 min)
Video: Three reasons why we’re still bullish on gold (3 min)

Thought of the day

The S&P 500 gave back its November gains as hawkish comments from Federal Reserve officials and valuation concerns weighed on investor sentiment. The benchmark fell 1.7% on Thursday, while the tech-heavy Nasdaq slid 2.3%.

San Francisco Fed President Mary Daly on Thursday said it’s “premature” to make a decision ahead of the Fed’s policy meeting next month, while Minneapolis Fed President Neel Kashkari said he’s on the fence about a December cut. These remarks added to a series of Fed comments this week expressing skepticism over the need for an imminent interest rate cut, prompting markets to scale back expectations for policy easing in December. Fed funds futures are now pricing in an implied 52% probability of a 25-basis-point cut next month, down from nearly 100% a month ago.

But we think the US central bank remains on track to cut rates twice more in the coming months, and our analysis of the dotcom era suggests that conditions which led to the bubble then are not present today.

Additional data should justify more Fed cuts ahead. Despite the cautious rhetoric from Fed officials this week, we believe any decision will ultimately be data dependent. With the US government now reopened, the Fed’s decision will be guided by incoming data on inflation as well as employment. Even if the official October jobs report does not include the unemployment rate reading, as suggested by National Economic Council Director Kevin Hassett, the payrolls figure should still provide a good indication of the health of the US labor market. Other available data, such as those compiled by ADP Research and outplacement firm Challenger, Gray & Christmas, as well as sentiment surveys, should also allow the Fed to continue its rate-cutting cycle if inflation remains under control.

Vendor financing, a key factor in the formation and collapse of the dotcom bubble, has declined significantly. Our examination of events in the lead up to the dotcom bubble suggests that we are unlikely in one now. Vendor financing was prevalent during the telecom boom—equipment manufacturers helped finance smaller companies with limited creditworthiness or large infrastructure projects that traditional financial institutions were cautious about, accepting greater risk to facilitate sales and expand market share in a competitive sector in the late 1990s. At its peak, vendor financing from North American suppliers exceeded 120% of their pretax earnings, based on our estimates. The financial reforms in the early 2000s fundamentally changed vendor financing practices, with enhanced disclosure requirements and more rigorous accounting standards. Fast-forward to today, we estimate that the recent collaboration between NVIDIA, Oracle, and OpenAI represents only about 5% of NVIDIA’s projected pretax earnings for 2026.

Current valuations are supported by strong tech fundamentals. The cautionary tale of the dotcom bubble has also led companies to prioritize organic growth over a reliance on credit-driven strategies. Leading tech companies today generate more stable revenue streams, and they have maintained stronger cash positions and balance sheets. As they continue to demonstrate solid earnings growth, we believe the valuations of today’s tech giants are justified. Additionally, one-year P/E ratios have shown little predictive power for short-term returns, based on our analysis. Even cyclically adjusted P/Es, which smooth out earnings over a decade, only loosely correlate with long-term outcomes. Relying solely on these metrics would have kept investors out of the market for much of the past 30 years, a costly mistake given the strong returns.

So, with the Fed likely to cut rates further and tech companies reporting strong earnings, we maintain our view that the equity bull market is intact. We expect the S&P 500 to rise to 7,300 by June 2026 and recommend investors ensure sufficient exposure to structural growth trends, including AI.