Since the start of the war between the US/Israel and Iran, the markets — as rather cold, discounting mechanisms — have been primarily focused on assessing and pricing in the effects of the closure of the Strait of Hormuz on economic growth and inflation. After many false starts, during which the need for President Trump to reopen the Strait became increasingly evident, a 60-day memorandum was signed last month that, among other things, reopened the Strait to shipping traffic. That traffic has been increasing rapidly since then, although it is still far from pre-war levels. Nevertheless, the markets are relieved, a sentiment particularly evident in oil prices and inflation expectations (see chart below). Both have fallen sharply, with the added benefit that the risk of tighter monetary policy has diminished. Of course, the markets — just like us — are still proceeding with caution due to the uncertainty surrounding the negotiations for a final deal. The impact of the disruption that has already occurred and the time needed to return to “normal” are also causes for concern. Still, the prevailing sentiment is one of relief that the Strait is open again and that the likelihood of an inflation uptick scenario has decreased.
As for that other major trend in the markets — the rise of AI — things weren’t quite as positive last month. The Magnificent 7 slipped into negative territory, and even the semiconductor and memory chip companies gave up some of their massive price gains. Of course, this could simply be the result of waning euphoria. But there are also concerns being raised that the costs of AI implementation are high and rising rapidly. To curb those costs, companies have already begun deploying models more selectively for different tasks, including the use of open-source models such as DeepSeek. This, of course, casts doubt on the growth and profit projections of AI developers. In addition, the massive profit increases among AI developers’ suppliers are making their investment plans even more costly than they already were. This slight pullback, however, does not give us cause to reconsider the increased likelihood of the Boom-Boom scenario. This scenario describes an environment in which economic growth, inflation, and monetary policy remain within acceptable ranges, while optimism about new technology propels the stock market to new heights. The rise of AI fits within that scenario and, in our view, has only just begun, and its positive impact on corporate earnings is far from over. The recent caution does, however, underscore the point that this scenario is accompanied by significant volatility and that euphoria and disappointment can follow each other in quick succession.
The tension between better news from Iran and some caution surrounding AI is clearly reflected in the returns of the various US stock sectors in May and June, as shown in the chart below. While technology led the market in May, industrials, healthcare, and financials took the lead in June. Financials, in particular, benefited from the decline in inflation risk, which, conversely, hit the energy sector hard. The SpaceX IPO also appears to have influenced sentiment more negatively than positively. After an initial rise, the stock quickly fell back toward its IPO price.
Ultimately, despite the conflicting developments surrounding Iran and AI, June was, on balance, a good month for the financial markets. All major stock markets ended the month in positive territory, as did the bond markets. The diversification we seek in small-cap stocks and frontier markets also paid off, with small-caps being the top performers in June. We do not yet have data for June regarding our private market investments, but the trend from April and May is positive. Looking ahead, the reduced likelihood of the Inflation Uptick scenario is good news, and we are taking cautious steps to better reflect the Boom-Boom scenario in our portfolios. To that end, last month we expanded our position in the “Electrification” theme, which is also benefiting from the rise of AI.
BY: WOUTER STURKENBOOM, Chief Investment Officer