AI, Japan, Election: What changed this summer?

This summer marked a significant turning point in global markets, driven by four key developments, according to analysts at Gavekal Research in a note this week.

First, the firm said that China's leaders "dashed economic hopes" by delivering "very little of substance" at the Communist Party's third plenum.

Gavekal explains that investors were expecting more decisive action to support the economy, but those hopes were left unfulfilled.

Second, the firm says the artificial intelligence (AI) bubble began to deflate as investors started questioning the returns on the billions invested in large language models and Nvidia (NASDAQ:NVDA ) chips.

Gavekal Research notes, "It does seem the bloom is now off the rose," pointing out that even strong earnings from Nvidia weren't enough to reignite enthusiasm for the sector.

Third, Japanese authorities signaled an end to the era of "free money," suggesting that borrowing yen to invest in foreign assets is no longer the one-way bet it once was.

Gavekal highlights that the Bank of Japan's shift is "unwinding the yen carry trade," a major strategy for global investors.

Lastly, Gavekal highlights the revision in US job numbers sparked concerns that the US economy might not be as strong as previously believed, leading to fears of a potential slowdown.

The firm believes these four factors contributed to a "brutal sell-off in richly valued tech stocks," particularly in overvalued names like Nvidia, which lost over US$700 billion in market capitalization since its June peak.

The sell-off also extended to other cyclical sectors like energy, materials, and industrials.

Looking ahead, Gavekal warns that "without some new technological breakthrough, the air will continue to seep out of the [AI] bubble."

"We have likely entered a bear market in tech stocks," states Gavekal.

Meanwhile, the firm says the approaching US election is likely to further delay business investments, adding another layer of uncertainty to the economic outlook.

AI disillusionment, China's economic struggles, Japan's policy shift, and US economic concerns have combined to set a more cautious tone for the markets.

Source: Investing.com