End of the cycle or entry point? The market backdrop has changed. Stock market momentum has faded markedly in recent weeks, with markets becoming more volatile and, above all, more divergent. Growing doubts about the strength of the AI story have taken hold and triggered a reassessment of the sector. Christopher Dembik, Chief Strategist at Pictet AM, shares his analysis and his tips on how to structure portfolios in the coming months.
The considerable level of investment required in AI is starting to raise questions among investors, who are wondering above all how long it will take to earn a return on it. The yield on the 10-year US Treasury remains at an elevated level (4.9%), and selective investors can find opportunities in the bond market.
Technology companies reported broadly more than decent second-quarter results, yet their shares have come under pressure. The culprit: heavy investment that has taken a severe toll on cash flows. “We should not overstate concerns about the volume of investment by the hyperscalers,” explains Christopher Dembik. “Negative cash flow at the four big players (Amazon, Meta, Google and Microsoft) is worrying investors. As a result, share buybacks are likely to be scaled back. But let’s keep a cool head. The $200 billion of announced investment will go towards fulfilling an order book that has already been signed and is estimated at $2 trillion, ten times the announced investment.” In short, the long term must take precedence over the short term.
No need to panic
“To put these concerns into perspective, this capital expenditure will materialise over the next two to three years. There is no need to panic. Hyperscaler valuations look attractive at the start of November. From 2028, cash flows will turn positive again and, by our estimates, reach around $600 billion in total by 2030. And we should not forget the momentum of the last three quarters, each of which delivered 25% earnings growth.”
From a macro perspective, there are no warning signs in the United States. US household consumption remains on a positive trajectory. The labour market has admittedly lost some momentum in recent months, although that picture was somewhat contradicted by the October figures, which showed 166,000 new jobs, far more than expected. Growth nonetheless remains solid and should hover around 2.5%, with roughly a third of it coming from AI. Inflation shows little sign of rising much further and even appears to be under control.
As a result, Pictet AM has decided in its asset allocation to remain overweight US technology stocks and to stay invested in the Japanese market, while its managers have a soft spot for the South Korean market and its technology champions, provided investors are willing to accept somewhat more volatility. “The Kospi, the South Korean index, trades at four times earnings, something not seen since 2006. The AI/infrastructure/semiconductor theme remains central to portfolios. It is worth noting that seasonality in the first three months of the year is favourable.”
Pictet AM’s credit specialists are considering a cautious lengthening of maturities in their bond portfolios. The yield on the 10-year US Treasury remains at an elevated level (4.9%), and selective investors can find opportunities.
Emerging market local-currency bonds are one example: they currently offer attractive yields and stronger fundamentals than in the past, making them a credible alternative within the bond market. European investment-grade credit is starting to look attractive.
France…
In France, by contrast, economic momentum is slowing, with little improvement in sight. The economy is held back by soaring interest rates and yields, deep reluctance to invest and an inevitable rise in unemployment. Only industry still seems to be holding its own (industrial production).
A change of course for gold?
“I get a lot of questions about the yellow metal,” adds the strategist, who is betting on a rebound. Rising long-term rates and a stronger dollar, the headwinds that pushed the price per ounce lower this year, are themes that should fade in 2027.
The Chinese market remains cheap, but Christopher Dembik does not see attractive opportunities there. There is little point in investing, other than with a stock picker’s mindset, in a sector such as luxury goods, for example.
Finally, the strategist remains very cautious on small caps, which lack appeal because their debt has to be refinanced at higher rates.
European natural gas prices have soared 40% in a few months, a factor to bear in mind for energy-intensive industries.
