Key Takeaways
- Oil prices have tracked shifting expectations around Iran. Oil declined over 16% in May on optimism for US/Iran de-escalation. Nearly all of that decline came in the last week of the month, as a near-final 60-day agreement was widely reported to be close. That move partly reversed on June 1, when oil surged more than 6% after tougher U.S. terms were sent back to Iran and Iran reportedly pushed back following further Israeli attacks on Lebanon.[1]
- AI capital spending is driving growth but keeping inflation sticky. AI capex building out compute supply remains the dominant market theme and, in our view, the most significant macro and micro theme today. That spending is a major marginal contributor to economic growth[2]. But because demand for compute is outpacing supply[3], it is also pushing input prices higher, adding to energy inflation and helping keep core inflation sticky. Over time, we expect real productivity gains, along with ROIC and cash flow generation from hyperscalers[4], to be critical to sustaining this spending and supporting future earnings and stock prices.
- Earnings revisions continue to support valuations and US market leadership. Equity market gains have mostly followed improving earnings estimates. That helps explain why forward P/E multiples have moved back above 10-year medians without making valuations look as extreme once those higher earnings expectations are taken into account. At the same time, the twin themes of “energy independent vs. dependent” and “AI winners” have favored the S&P 500 over MSCI EAFE since the onset of the Iran conflict.[5] The U.S. is now outperforming MSCI EAFE year to date after a slow start to the year.[6]
- The AI spending cycle is broadening into earnings leadership. Hyperscaler spending has become other companies’ revenues. Those revenues have moved dramatically higher as the build-out of compute infrastructure broadens into downstream hardware, design, and memory. That transmission mechanism has been a major driver of earnings revisions, stock-price leadership, and narrower market concentration. It has also raised the bar for eventual productivity gains needed to justify the scale of the investment.
The attached PDF is a summary of Pathstone’s full report, which is available to clients upon request.
