From the studio

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Thought of the day

NVIDIA is set to release its April-quarter earnings today after market close, and the consensus estimate is for an 80% year-over-year increase in revenue and 120% y/y growth in earnings per share. Investors also anticipate its results to beat expectations, with the chipmaker likely to offer guidance above analysts’ forecasts.

Without taking any single-stock views, the results come at a delicate time for markets. The Philadelphia Semiconductor index has rallied as much as 70% since its March low, while inflation fears are pushing global government bond yields to multi-year highs. Risk sentiment has retreated in recent days amid worries that rising yields could undermine the strength in corporate profits that has driven the recent rally.

We continue to hold a positive outlook on the secular trend of AI, and believe that exposure to this transformational innovation will remain a key differentiator for equity market performance over the long run. But several risks on the horizon also mean that investors should approach the theme through diversified and active investing.

Semis valuations are approaching historical highs. Following the recent rally, valuations for semiconductors and hardware stocks have become more demanding, at around a 27x forward price-to-earnings ratio currently. This is approaching historical peaks of around 29x observed in October last year and June and March 2024. While valuations have limited influence on returns over short-term horizons, worries over valuations can lead to volatility.

Elevated yields may be a near-term headwind. The lack of meaningful progress toward reopening the Strait of Hormuz has intensified inflation concerns and pushed yields higher amid market expectations for tighter monetary policy. We think yield volatility could pick up further while the conflict is unresolved, and this could continue to weigh on tech stocks, especially given their heavy spending plans. But we also expect growth risks to come into focus in a scenario where the Strait remains blocked for a prolonged period. This scenario could lead to interest rate cuts from major central banks.

Robust AI demand and monetization should drive long-term performance. Despite these headwinds, fundamentals for the AI growth story remain strong, in our view, supported by sustained demand and robust monetization. Anthropic’s annual revenue is reportedly poised to reach a USD 50bn run rate by the end of June, hyperscalers have reported accelerating cloud growth and an order backlog of around USD 2tr, and the rising adoption of consumer agentic AI should provide another growth driver.

So, we recommend investors stay positioned for long-term gains in AI with a diversified and active approach. We continue to favor platform and application beneficiaries that are well placed for AI use cases, as well as infrastructure names with strong pricing power and competitive positioning in their respective supply chains.