Invesco's Chief Global Market Strategist Brian Levitt notes rising anxiety among investors. Market pullbacks and short-term volatility are normal aspects of investing, yet every time the market adjusts, investors inevitably ask whether a fundamental shift has occurred.
The recent decline in technology stocks, particularly among chip and memory-related companies, has intensified these concerns. However, from a longer-term perspective, the impact of this downturn may be less severe than it appears. In fact, many companies at the center of the sell-off have experienced significant gains over the past few quarters, leaving their year-to-date stock prices still substantially higher. Credit markets, which typically reflect underlying economic stress, remain stable. Credit spreads are under control, indicating that markets are not worried about slowing economic growth or deteriorating financial conditions.
Meanwhile, the S&P 500 Equal Weight Index continues to approach record highs. This is not the behavior of a market signaling an impending recession or systemic risk. Instead, it looks more like a period of consolidation following a historic rally, focusing on the most favored and strongest performing sectors. This adjustment is not driven by weakening demand; in fact, fundamental data suggests the opposite. Many companies in the AI supply chain continue to report strong earnings. Backlogs at key suppliers are rising, indicating that customer demand for computing power and related services still exceeds current supply capacity. In other words, the challenge is more about supply shortages than weak demand.
The concern is not that AI adoption is stalling, but whether current investment levels are ahead of future returns. If AI represents only another routine software upgrade cycle, fears of overinvestment are understandable. But if AI signifies a structural reshaping of the global economy, its potential impact is far deeper than markets currently anticipate. AI is gradually penetrating sectors like healthcare, manufacturing, financial services, and education. If this trend continues, current investment levels may not be excessive when viewed through the lens of demand over the next decade. The scope for growth in computing infrastructure, power supply, network capacity, and data centers could exceed what many investors now expect.
On inflation, various data points suggest there is no need for overly pessimistic interpretations of the Federal Reserve's interest rate stance. Inflation expectations remain largely stable. Financial markets reflect these concerns in real time, yet both the inflation swap market and US Treasury breakeven inflation rates show no sign that investors anticipate significant inflationary pressure ahead. Markets are inherently forward-looking, and the signals they currently send indicate that medium-term inflation is likely to stay under control. With inflation expectations steady, the argument that the Fed is clearly behind the curve is unconvincing.
Invesco believes this does not mean market volatility is over, nor that tech stocks will avoid further corrections. Momentum-driven sectors often overreact in both up and down markets. However, investors should not mistake a retreat in momentum for a deterioration in fundamentals. The overall market performance, credit conditions, inflation expectations, and AI-related demand trends all point to a different conclusion. What we are seeing is not the end of a cycle, but rather a period of consolidation within the same cycle.
Comments