'Rise of AI' continues to fuel market strength: Strategist

According to the US Census Bureau, retail sales growth in May slowed to 0.1% versus an expected 0.3% increase for the month. What does this signal from consumers and for potential changes in the Federal Reserve's interest rate policy?

BlackRock Global Chief Investment Strategist Wei Li joins Catalysts to discuss her latest note addressing inflation, how it relates to the recent retail sales report, and why AI and tech may lead to an increase in overall inflation.

"Despite the fact that markets priced out five cuts by the Fed in 2024 compared to beginning of the year, equities are very strong. And the reason that equities are very strong is because we have seen very strong earnings driven by AI and tech-related names," Li explains. "So there is a bit of a disconnect between what rate markets are suggesting and what equity markets are actually doing. And the reconciliatory term here is the 'rise of AI' and what that means for powering stronger and stronger earnings, which is why we are positive on broad equity market."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video transcript

All right.

Well, let's talk about the rally that we have seen some of those gains because this morning, we got the latest reading on the consumer retail sales data out showing that consumer spending is slowing more than economists had initially anticipated.

Could the economic data push up the timeline for rate cuts we wanna bring in way, Lee blackrock, Global Chief Investment strategist.

Well, it's great to have you here.

So talk to me just about how you're comparing the run up that we've seen obviously in the market here.

We are not far from those all time high numbers and comparing that to maybe the slowing that we've seen in the econ data.

Is that a bit concerning for current valuations?

Well, what we have seen so far is that despite the fact that markets priced out five cuts uh by the fed in 2024 compared to beginning of the year, equities are very strong.

And the reason that equities are very strong is because we have seen very strong earnings driven by A I and tech related names.

So there is a bit of a disconnect between what rate market are suggesting and what A markets are actually doing.

And the reconciliatory term here is the uh the rise of A I and what that means for powering stronger and stronger earnings, which is why we are positive on broad equity market.

We prefer equities over government bonds and specifically within equities in the US.

We like tech.

Ok.

So talk to me about the sort of Capex piece of your note here, you talk about A I Capex potentially leading to an increase in overall inflation.

Can you explain that pipeline for me?

Um indeed, what is happening right now is that companies are coming out of the pandemic with quite strong balance sheets and their ability to generate free cash flow has been very, very impressive.

And that's also in part why we're positive on the US equity market more broadly and the ability for the companies to spend in A I infrastructure build out data center is why this is actually a very, very important theme as we think about the next leg uh to play the A I theme and the A I build out has two implications.

Number one, it actually can be inflationary, right?

And I think that was underappreciated at the beginning of the A I uh um A I boom because people are automatically thinking OK A I leads to productivity Deb boon and that could be deflationary.

But before we even entertain the possibility of productivity boom, we have to go through the Capex build out phase that in the context of supply constraints also with the low carbon transition, competing for some of the same resources can be inflationary.

But a second implication of this is that it actually spells great opportunities for infrastructure, for example, and private market that allow us exposures to the early journey of some of these A I beneficiaries.

So we are very positive on infrastructure uh and also related sectors, you talked about industrials earlier, but also materials and energy are likely beneficiaries of this transition and of this uh um build out that we are expecting.

So what when you talk about the fact that A I build out there could potentially be inflationary, at least in the near term.

How problematic is that for the FED A?

Can you put that I guess a little bit more specifically just in terms of what exactly that is going to look like the data here and the numbers I I would say that I am more confident about the sequencing rather than the exact timing uh by which I mean, I'm not sure that it is going to be inflationary in the immediate term.

What I'm saying is that before it gets to the deflationary stage through the productivity boom, we are likely going to see the inflationary effect from the Capex boom first.

But it takes time for uh companies to build out their A I infrastructure.

So it may not be immediately showing up in the numbers.

In fact, if you think about, if we look at kind of um the the the the unwind of pandemic uh good service mismatch, there is room for inflation to potentially go even lower.

Supporting our conviction that this year the fed is going to start cutting um two cuts likely um especially in the context of the inflationary environment, I just talked about as well as the softer uh data from a elevated level.

Today's retail sales number case in point.