May’s Signals & Strategy: The Thin End of the Wedge

Signals

Equity markets are trading as if we are moving towards peace, even as war is still very much with us (bond markets seem less convinced). Global equities have pushed to fresh highs on headlines that the US and Iran may be nearing a deal. Fear of missing out is back. Earnings season has helped, with first quarter results comfortably beating estimates, led again by AI and tech heavyweights.

However, the Strait of Hormuz remains closed, and the energy price shock is only cushioned by rapid inventory drawdowns. The buffers are finite, and each week raises the risk of slower growth, particularly for energy‑dependent Europe.

Meanwhile, the semiconductor trade has become stretched. Narrow leadership is doing most of the heavy lifting, whilst many consumer‑exposed and rate‑sensitive stocks lag, especially in Europe.

Below the headlines, the AI capex story keeps compounding. US data suggests that AI‑related capex contributed 40% of the first quarter economic growth. Emerging market equities have rocketed, driven by semiconductor and related hardware stocks in Korea and Taiwan. The weights in the MSCI Emerging Markets index of those two markets have surged, while India’s has collapsed.

All of this is consistent with an equity market still on a structural bull path tied to AI and capex, but constrained near term by energy, rates nerves, and widening social and political fault lines.

Strategy

In the very short run, a credible path to reopening Hormuz would support a further squeeze higher in risk assets, with Europe and its beaten‑up consumer-, energy- and rate‑sensitive segments likely to benefit tactically. Conversely, any breakdown in talks could reverse the latest melt‑up and push bonds and oil back into the driving seat.

The AI capex supercycle remains the central structural theme. The contribution of AI‑linked spending to US growth is now measurable rather than anecdotal. That supports semiconductors, data‑centre infrastructure, power and grid investment, selected industrials, and the materials needed to sustain them. But the near‑vertical move in computer memory and associated costs is prompting buyers to look for ways to cut compute costs. Because ‘nothing cures high prices like high prices’ the search for more efficient solutions will intensify.

Against this backdrop, we are wary of extrapolating the current narrow leadership indefinitely. The Mag Seven and related AI still sit on demanding expectations even as near‑term earnings remain robust. At the same time, low unit labour cost growth and a falling labour share of GDP are strengthening margins more broadly, which is supportive for equities as an asset class.

What does this mean for our portfolios?

Equities remain the better long‑term inflation hedge, but after the recent rally and given the unresolved energy shock, we are constructive rather than outright bullish. Within equities, we continue to like the capex and ‘picks and shovels’ complex – miners, industrials tied to electrification and power, and quality hardware within the AI stack – but recognise that some segments are vulnerable to sharp pullbacks after strong rallies.

For fixed income, the combination of softening unit labour costs and sticky headline inflation argues against big duration bets for now. Rate cuts look slower and shallower but have not disappeared. Meanwhile, sovereign balance sheets and inflation uncertainty limit the appeal of long bonds as a simple alternative to equities.

The bigger unresolved issue is political economy. A world where productivity rises, profits are protected, AI capex booms, and labour’s share of income falls may be very friendly to earnings – until voters decide it is not. That is an important part of the backdrop for any multi‑year investment thesis.

For now, we stay invested.

Each month, the Keyridge Multi-Asset desk will provide a candid look at the key market signals shaping our portfolio construction.

- Craig Rippe, Head of Multi Asset at Keyridge UK