Susannah Streeter, Chief Investment Strategist, Wealth Club: “The mood is cautious at the end of the week, which has seen hopes rise and fall about a resolution in the Middle East conflict and nervousness creeping in about breathtakingly high AI-powered valuations. Although the FTSE 100 is set to edge higher at the open, investor sentiment remains fragile as the drawn-out conflict between the US and Iran continues to cloud the outlook. The longer it continues, and energy supplies and other commodities are snarled up, the greater the inflationary pressures will be. Key US jobs figures out later for May will be closely watched for the effect the conflict is having on business sentiment, with employers appearing increasingly cautious about taking on new staff. The non-farm payrolls report is expected to show a decline in new hires to around 85 thousand, as the jobs market cools down from 115,000 in April.
In the UK, house prices dipped back in May as the war-induced energy crunch took a toll. Worries about rising household bills and fears that interest rates will be hiked this year have dampened demand. While on an annual basis prices are still up 0.5%, month-on-month they fell 0.1%. The shortage of properties in sought-after locations is likely to have kept big pockets of the market more resilient, but the downward trend is evident.
On the geopolitical front, conflicting messages from both Iran and the US have seen sentiment turn erratic. For now, oil prices are managing to stabilise around $95 a barrel, in the absence of a big reignition in the US military campaign. But there remain big questions about how negotiations can meaningfully progress, especially with Israel’s actions in Lebanon such a sticking point. Hezbollah rejected proposals for a ceasefire, and although there are now reports it's seeking fresh talks with the US, this will be a highly complex situation to resolve. The US military action in Iran has opened a can of worms, with a slippery mix of geopolitical tensions escaping diplomatic attempts at containment, and threatening to unsettle markets further.
Usually, a crisis of this kind would have had a more crushing effect on valuations given the inflationary risks it brings. A fifth of the world’s energy supplies are still facing huge disruption due to the closure of the Strait of Hormuz. However, the bright lights of AI have been bleaching out the geopolitical worries on the world stage. But doubts are beginning to creep back in about the durability of mega revenue streams, which has led to a spate of profit-taking. This has been prompted by chipmaker Broadcom’s update. Although the huge earnings it's raking in are highly impressive, a very high bar has been set, and expectations for future sales were missed. The company is standing by its $100 billion AI revenue forecast for fiscal 2027 and didn’t upgrade it. While this is a mega number, Broadcom shares are around nine times the level they were at before the groundbreaking launch of ChatGPT in 2022. With such a rapid ascent, it's not surprising there are wobbles at this height. Shares slid more than 12%, prompting falls for other tech stocks in Asian trade. While it's clear there is voracious demand for AI products and services, the extent to which spending by companies is being front-loaded is not clear.
There is also a longer-term risk that the huge capital expenditure projects being unleashed could weigh down innovation-focused tech companies with mega infrastructure assets which risk becoming outdated in the future.”
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