Weekly Market Overview

The paradox in today’s financial markets is that, at least in the U.S., it is positive news that is driving volatility. Technological innovation is occurring at such a dizzying pace that investors can barely keep up with its consequences, let alone price them in. The financing needs of that innovation are driving up the cost of capital. And all of this is leading to stronger-than-expected economic growth and upward revisions to earnings forecasts.

Over the past week , all eyes were on Muse, Meta’s personal AI assistant, which was enthusiastically received by both consumers and investors. Muse knocked ChatGPT off the top spot in the U.S. Apple App Store, sparking a 15% rally in Meta’s stock. Meta closed the week near its all-time high. Then the second wave of momentum came into play. The market (once again) bought into the AI supply chain—specifically semiconductors, semiconductor equipment, and IT hardware. And it sold off all business models that could be disrupted by such an AI assistant—especially consumer companies with subscription models (from the NYT to gyms), financial firms such as insurers and banks, and platform companies in travel and mobility (from Uber to Booking.com).

Whereas the market rally was broadening out not long ago, we are once again in a stock market driven by a very small group of companies. On the day the Nasdaq set a record, thirty S&P stocks hit their year-to-date lows, compared with seven new highs, and the equally weighted index gained a mere 0.18%, compared with 1.55% for the index itself.

On Wednesday, the bill came due, and it came from the bond market. Thanks to a booming industry, the PMI jumped to 58.4—its highest level since July 2021—with input costs rising at the fastest pace since 2022. Investors saw this as a signal that more interest rate hikes are on the way. When the Treasury sold $70 billion in five-year notes that afternoon, buyers demanded a premium: the auction closed 3.1 basis points above the market price—the second-largest spread ever for this maturity—with foreign demand at 54% compared to an average of 65%. The 10-year yield jumped 15 basis points to 5.11%, the highest since 2007 and the largest one-day move in nearly two years. The 5-year yield rose above 5%. As the U.S. Treasury increasingly finances itself in the short term, the yield curve is flattening, and this week, too, short-term yields rose faster than long-term ones.

Despite missiles flying back and forth, attacks on refineries, and war rhetoric, the price of oil fell. Diesel at the pump, on the other hand, reached a record high of $6.51. The financial market is therefore banking on a diplomatic resolution, both in Iran and in Ukraine. Meanwhile, the physical market reflects the actual shortages and bottlenecks in the supply chain.

Despite seemingly contradictory movements and narratives, financial markets remain an ingenious mechanism for pricing in what is happening in the world and what the possible outcomes might be. Today, the market places a higher value on scarcity: commodities, energy infrastructure, semiconductors, certain industrial assets, and even gold and Bitcoin. Valuations are falling where there is an oversupply: bonds, consumer goods, and commercial real estate. Companies that are reinventing their business models are seeing their valuations rise, as we saw with Meta last week. Business models that could be disrupted by the rise of AI are being punished even before the impact is clear. All of this is leading to unprecedented volatility, not only in terms of prices but also in terms of market narratives. In this context, the stable “Buy & Hold” portfolio full of quality stocks is not performing well. The flexibility and agility required of active investors in this market are increasing. Perhaps an AI agent could help.