AI earnings shield US stocks, but bond risks rise: Jefferies' Wood

Mumbai: US equities have largely shrugged off rising bond yields and geopolitical tensions so far this year, helped by strong earnings growth fuelled by the AI capital expenditure cycle, said Jefferies global equity strategist Chris Wood. Still, the bond market is now reaching levels where the risks to equities are growing, most particularly with the US Federal Reserve turning more hawkish, he said in his newsletter Greed & Fear.

The yield on the US ten-year and 30-year government bonds hit 5.34% and 5.69% respectively to their highest levels since April 2002 and May 2002, partly contributing to last week's slide in Indian equities, which posted their eighth straight week of losses till Friday.

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While US stocks have historically tended to perform poorly in the run-up to mid-term elections before rallying thereafter, that pattern has not played out this year, according to Wood.

"The stock market has historically done relatively badly going into the mid-terms whereas that has not been the case so far this year, primarily because of the stellar earnings growth driven by the highly earnings-accretive AI capex cycle," he said.

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According to Wood, investors are facing three issues: the first, and perhaps most important for equities, is the duration of the AI capex cycle and whether there will be adequate returns from the massive spending.

He said the second concern is the renewed realisation that G7 government bonds are in a structural bear market, while the third is the state of play in shifting geopolitics.
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