Equities on borrowed time
SPY•Capital Economics says the AI-driven equity rally, commodity swings and rising bond yields may be nearing turning points, and expects the AI rally to eventually turn into a rout. The STOXX 600 fell 1.1%, with about 90% of stocks lower.
1. Three themes near turns
Capital Economics said investor enthusiasm for AI-exposed equities, swings in commodity prices and rising bond yields drove markets in the third quarter, and it believes all three are close to turning points. The consultancy expects commodity prices to fall back, while government bonds may recover as tightening cycles underwhelm expectations.
2. AI rally risks
Capital Economics said the AI-driven equity rally may be stretched and could turn into a rout. It cited valuations, lofty earnings expectations and increasing sensitivity to interest rates, noting that Shiller's CAPE and the index's price-to-book ratio are high by historical standards.
3. Regional outlook
If the rally ends, Capital Economics expects the largest declines in the United States and South Korea, while Taiwan and Japan may also suffer. It said Europe could be relatively insulated and projected the region to be the best performer of MSCI's regional indices over the next couple of years, while still expecting disappointing economic growth.
