As the Australian funds management industry convened at the Sydney Opera House for the Sohn Hearts & Minds conference, global investors are facing a resurgence of doubt. The S&P 500’s recent slide reflects this uncertainty, triggered by comments from Boston Fed president Susan Collins regarding potential hesitation in further US interest rate cuts. This has reduced the probability of a December easing by the Federal Reserve from near certainty to just 54 per cent.
The absence of anticipated rate cuts could jeopardise the ‘Goldilocks’ scenario that has propelled equity markets to record highs. This scenario depends on a supportive Federal Reserve, strong company earnings, robust AI spending, and the resolution of trade tensions. Concerns are also mounting about a potential policy error by the Fed. Nick Ferres, chief investment officer at Vantage Point, highlighted a significant decline in US consumer confidence, particularly regarding the labour market, which is nearing 50-year lows. This raises concerns about a potential US economic downturn and the Fed’s delayed response.
Simultaneously, questions surrounding artificial intelligence are intensifying. The index tracking major tech stocks has declined, with Nvidia experiencing a notable drop from its peak. Michael Burry, known for his prescient bet against the subprime mortgage crisis, has closed his fund, Scion Capital, citing a disconnect between his valuation methods and the market. In contrast, Australian data centre cooling group Firmus Technologies, which provides cooling solutions for data centres, recently secured $500 million in funding, boosting its valuation to $6 billion. The company helps to keep the servers that power AI and other technologies cool.
While the AI hype persists, concerns persist about energy demands and revenue generation. Research suggests a substantial energy shortfall for US data centres, requiring trillions in investment. Furthermore, achieving a reasonable return on AI investments necessitates significant recurring revenue from consumers and corporations. These factors contribute to a growing sense of unease, suggesting the market may be approaching a ‘show-me-the-money’ moment, with potential implications for markets worldwide, including Australia.
