Highlights
After a rather cloudy July, most equity markets rebounded in August. With economic growth holding firm, inflation proving less concerning than expected, the labour market close to balance, and corporate profits at record highs, it is not hard to see why.
So, why worry? For several reasons, actually. This month, we examine three of them: artificial intelligence (AI), debt and wars.
Turning to the AI investment cycle, the latest corporate results suggest that fundamentals remain solid. Admittedly, some factors are temporarily boosting the magnitude of profits, but judging by relatively moderate equity valuations, investors do not appear to be entirely irrational.
Meanwhile, while total U.S. economy-wide debt — government, households, and businesses — as a share of GDP stands near a 20-year low, it is obviously the trajectory of public finances that remains the main concern. Yet, the most likely consequence is not necessarily a sovereign debt crisis, but rather a continued rise in the risk premium demanded by investors, compounded by uncertainty surrounding the Federal Reserve’s next moves.
Finally, on top of a lingering U.S.–Iran conflict and a Russia–Ukraine war that threatens to intensify, hopes for an easing of the Canada–U.S. trade war collapsed in August. What comes next remains uncertain, but one thing is clear: the U.S. president’s room to “wage war” is not getting any wider.
Bottom Line
Overall, the past few months have unfolded largely in line with our base-case scenario, and the fundamentals underpinning the bull market remain firmly in place. Still, close attention to risks remains warranted as we enter a potentially more volatile period, notably in the run-up to the U.S. midterm elections.