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KAPITALKOMPASS #64: Underestimated Risks: The Second-Round Effects
Good morning, ladies and gentlemen,
Esteemed partners and investors,
While global stock markets, driven by a stellar US earnings season, appear to be signaling strength on the surface, a more complex picture is brewing beneath. The macroeconomic environment remains characterized by geopolitical tensions, persistent inflation expectations, and increasingly divergent global economic developments. While the US and parts of Asia are benefiting massively from ongoing investments in artificial intelligence and digital infrastructure, Europe is suffering from structural challenges and noticeably subdued consumer sentiment.
The crucial question for the coming months, however, is whether the financial markets have correctly priced in the potential second-round effects of the current crises. In our view, higher energy prices, persistently rising financing costs, and geopolitical escalation risks are currently being valued too defensively. Against this backdrop, we are maintaining a balanced, yet consistently selective, positioning for the assets we manage.
Stock markets: US profits drive global growth
On a monthly basis, global stock markets, as measured by the MSCI All Country World Index, recorded significant gains. The main driver of this movement remains unmistakably the USA, which now accounts for a monumental weighting of around 62% in the global index. This rally was accompanied by a surprisingly strong earnings season.
Earnings growth for companies listed in the S&P 500 was an impressive 27% year-over-year, significantly exceeding analysts' consensus estimates; over 83% of the companies delivered a "beat." Particularly noteworthy: For the first time in four years, all eleven sectors of the index recorded positive earnings growth – a sign of temporarily broad fundamental support for the US market.
European stocks, including Swiss shares, showed a slightly negative trend. Local corporate results were merely in line with historical averages and simply couldn't keep pace with the momentum of their US competitors. Weaker consumer demand, relatively higher energy costs, and ongoing uncertainty about the ECB's future monetary policy path are all weighing on the market.
In contrast, emerging markets proved to be in strong shape. Investors focused particularly on those markets with high exposure to the structural growth trends of semiconductor technology and AI infrastructure – above all Taiwan and South Korea.
Sector rotation: AI and energy remain the dominant drivers
Since the beginning of the year, a significant performance divergence has become apparent between the individual sectors. The technology and energy sectors continue to hold the undisputed leading position, while defensive sectors such as pharmaceuticals and healthcare are lagging behind the overall market performance.
Hardware & Semiconductors: Demand for high-end chips, data center capacity, and AI infrastructure remains strong. Hyperscalers are consistently expanding their capital expenditure (CapEx) budgets for AI applications; the global race for computing power guarantees this sector continued strong growth prospects.
Software & Cloud: After initial skepticism at the beginning of the year, investors are now increasingly recognizing the successful monetization of AI features in existing software ecosystems. Cloud, data analytics, and cybersecurity providers have been able to significantly improve their medium-term growth prospects.
Consumer goods (a more nuanced picture): While defensive, high-quality companies in the food, beverage, and household products sectors are performing well thanks to stable margins and robust demand, cyclical consumer goods stocks are coming under pressure. Higher energy prices and increased living costs are noticeably impacting consumers' real purchasing power.
Healthcare & Pharmaceuticals: This sector is among the clear laggards of the stock market so far this year. Institutional capital is preferentially rotating into high-growth tech segments, while regulatory uncertainties, debates surrounding drug prices in the US, and expiring patents (patent cliffs) are temporarily limiting its attractiveness. However, the long-term demographic fundamentals remain intact.
Chemicals & Raw Materials: Here we are seeing positive surprises. Higher prices for industrial metals and increasing infrastructure and industrial investment are supporting earnings. Many cyclical companies are benefiting from a sequential recovery in global industrial demand.
Energy (The Outperformer): Geopolitical tensions in the Middle East and the associated risks to global supply chains are keeping oil and gas prices high. This is resulting in excellent cash flows for the major energy companies, making the sector highly attractive to value investors through appealing dividend yields and massive share buyback programs.
Commodities: Energy prices as a latent inflation risk
Commodity markets exhibited their usual volatility last month. While precious metals consolidated amid rising inflation expectations and temporarily higher real interest rates, industrial metals recorded moderate gains.
The energy sector is reinforcing its role as a key risk factor. The unresolved geopolitical situation surrounding Iran, as well as the ongoing fragility in global supply chains, is driving a persistent risk premium on oil and gas prices.
Caution is advised regarding agricultural commodities: Rising energy prices directly impact production (fertilizer) and transportation costs. This is precisely where a classic second-round effect is emerging, which could drive up global food prices with a time lag – a risk that bond and equity markets are currently largely ignoring. In the medium term, we therefore do not expect any structural easing in commodity prices; however, we would opportunistically use any technical corrections to selectively expand our positions.
Cryptocurrencies: Slow consolidation at a high level
Bitcoin failed once again to break through the technically important 200-day moving average after a brief recovery. This underscores that the crypto market remains in a pronounced consolidation phase.
The $80,000 mark continues to act as a significant chart resistance level. On the positive side, there have been no major institutional sell-offs; however, the dynamic ETF inflows that could act as a catalyst for the next leg-up are currently lacking. As long as a sustained breakout from this range fails to materialize, both the upside and downside scenarios remain mathematically neutral. Consequently, we are maintaining our neutral weighting in the digital asset segment.
Conclusion: The dualism of AI euphoria and commodity risks
In summary, current market activity can be reduced to two dominant narratives: the global AI investment cycle and the price-driving developments in the energy and commodity markets. While both trends support corporate profits in the short term, they pose significant risks to medium-term inflation and interest rate trends at the macro level.
The excellent earnings performance of US corporations undoubtedly justifies some of the ambitious valuations. Nevertheless, risk management cautions against complacency: the danger is real that the second-round effects of rising energy prices, persistent inflation, and geopolitical turmoil will force central banks to adopt more restrictive policies than the market anticipates. A balanced, liquid, and highly selective positioning therefore remains paramount.
We hope these analyses provide you with sound guidance for the strategic allocation of your assets. We would be delighted to discuss with you and your family how to implement these insights into your individual asset allocation.
With best regards and happy investing,
Your service team
Disclaimer
Important legal notice: The information contained in this newsletter is for general informational purposes only and does not constitute investment advice or any other professional advice. The data and analyses provided here are based on sources we consider reliable; however, we assume no liability for their timeliness, accuracy, completeness, or quality.
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Source:
Torsten Leißner