S&P 500 Trails Emerging Markets, Europe

Описание: Rohit Chopra, EM Equity Portfolio Manager at Lazard Asset Management, examines emerging markets' role in the global AI supply chain.

Emerging-market stocks are heading for their strongest stretch of earnings growth since the 2002-04 super-cycle, powered by a surge in artificial-intelligence investment that is reshaping the asset class, according to Morgan Stanley.
That’s in “sharp contrast to the past decade,” when second fiscal-year estimates were on average revised lower from initial levels, strategists led by Jonathan Garner wrote in a note. 
The shift matters for investors weighing whether emerging-market stocks can extend their outperformance over US peers this year. It also highlights rising concentration risk, with chipmakers dominating upgrades and reshaping the earnings narrative away from consumption and old-economy sectors.
In what they describe as a “highly unusual cycle,” earnings estimates for this year for the MSCI Emerging Markets Index in their base case have risen 6.5% on average. Yet the strength is strikingly concentrated. The strategists said the entire upgrade has been driven by three firms, Samsung Electronics Co., SK Hynix Inc. and Taiwan Semiconductor Manufacturing Co.
Garner and his team have previously flagged key turning points in emerging-market equities. In the first week of October 2022, they upgraded the asset class, saying they saw signs it was bottoming. By the end of that month, the MSCI EM Index had reached its low.
The economic backdrop also hurt sentiment, after the PPI data.
After the report, “markets are a little less confident that the Fed, despite a new chairman, will continue on the rate-cutting path,” said Brad Long, chief investment officer at Wealthspire. He also flagged the current “rotational trade,” with software dropping as energy and industrial stocks climb, as investors “are not sure what the through-put of AI means.”  
Nvidia’s two-day drop of almost 9% came despite surging revenue and a better-than-expected first-quarter outlook, underscoring concerns about the high valuations of stocks that have rallied on the back of the AI boom.
The “positive earnings surprises weren’t on the scale of what markets got used to in 2023-2024, and arrived amidst growing scepticism about the AI trade in general,” Deutsche Bank strategist Jim Reid wrote in a note.
AI Ripples
Even as investors fret over whether the AI boom has pushed up some stocks too far, the steady rollout of AI programs has caused them to pull back from industries that look likely to be upended by the technology. 
That risk was fanned on Thursday when Jack Dorsey’s Block said it was cutting 4,000 employees, reducing its workforce by nearly half, in a bet that AI can increase productivity. That comes while the company’s fourth-quarter gross profit of $2.87 billion rose 24% year-over-year and topped estimates. Block surged 14%.
AI disruption explains much of this past week’s markets volatility, according to Citi strategist Scott Chronert. “The dynamic looks more like new tech displacement of existing tech business paradigms more so than AI boom or bubble talk,” he wrote in a note. News from Block was the “latest shot across the bow.”
Meantime, OpenAI will raise $110 billion in new investment at a $730 billion pre-money valuation. Investment includes $30 billion from Nvidia, $30 billion from SoftBank and $50 billion from Amazon.com Inc. OpenAI CEO Sam Altman said he doesn’t think his company’s fundraising deals look “circular” as long as revenue keeps growing.
In deal news, Netflix Inc. jumped 13% after dropping out of the fight to buy Warner Bros. Discovery, clearing the way for rival bidder Paramount Skydance Corp. to clinch its $111 billion deal for the studio.
In earnings news, Dell Technologies Inc. shares soared 21% after the company’s AI servers sales outlook beat estimates, a sign of robust demand. Autodesk Inc. climbed 5.7% after guidance beat estimates. AI datacenter company CoreWeave Inc. tumbled 21% after reporting a bigger-than-anticipated loss, signaling heavy spending.
Energy stocks climbed as oil rose  American forces in the Middle East

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