The UK market is largely exempt from the tribulations of the AI trade outlook, and the has tended to be the source of some support during times of higher volatility in that space this year. By the same token, the premier index has struggled to find a new positive catalyst to enable to recapture its record high in February, when its selection of strong, stable, and developed companies attracted global inflows. Nonetheless, the index has added 7.4% so far this year which, coupled with an average dividend yield of 3% gives an aura of reliability as opposed to runaway optimism.
In early trade, there was some weakness among mining stocks as well as the likes of Polar Capital, reflecting a more risk-off approach and a reaction to the tech weakness. In contrast, there was sufficient buying strength amongst defensives such as RELX, Reckitt Benckiser and Unilever, where for the latter the stock was boosted by two broker upgrades, to lift the index to a positive open.
US markets bounced back after a long weekend, led by a broad rise across the technology sector, although there were some ominous signs from Asia around the rising weight of expectation that AI stocks are now attracting.
In South Korea overnight, the index shed 8% despite the rebound that had been seen on Wall Street. Of particular note was Samsung Electronics, whose shares fell by more than 8% even after reporting a 19-fold increase in operating income to $58.7 billion in the latest quarter.
The wider issue is whether this is a new chapter for investor reaction, related not to any weakness in demand or immediate profitability, but rather to whether the level of earnings can be maintained in order to repay the trillions of dollars which have been funnelled into AI investment by the hyperscalers. The Samsung share price weakness could also, in part, be the result of investors locking in some profits after a run which has seen the stock rise by 129% in the year so far.
A further test of investor mettle is also on the cards, as another Kospi constituent, SK Hynix (NASDAQ:) aiming to raise $28 billion in a share issue which would see the stock join the in what would be one of the largest ever share offerings in the US, although some way behind the $75 billion which SpaceX raised last month. The shares have gained 228% in the year to date despite some relatively sharp declines over the last few weeks, and this offering is the latest acid test. Ahead of the offering and as a read-across from the Samsung reaction, the shares suffered a near 9% decline. The combined news has also led to both and pointing lower ahead of opening trades later today.
Prior to the developments in Asia, the main US indices all posted gains which included a new record closing high for the . Big tech was a main driver, with Broadcom (NASDAQ:) rising by almost 4% after announcing a long-term agreement to provide silicon products to Apple, while Dell Technologies rose by more than 4% after the President promoted the company by ringing the opening bell from the White House. Microsoft shares drifted after reporting that it would be cutting 4800 jobs, or 2% of its workforce, continuing a more recent struggle which has seen its shares fall by some 18% this year.
Thus, the second half of this year is setting up to be one which could define the AI trade in questioning whether the rate of return on investment is at the level which some stellar share price increases have been suggesting. If the room for upside surprises is limited, then fundamentals could make a return, which could provide some strong support – the last quarterly earnings season blew past expectations, general economic growth is healthy and the return of the to pre-war levels will ease some of the inflationary pressure which has been building, lessening the likelihood of an interest rate hike.
In the meantime, the scene is set fair after a testing six months for the market. In the year to date, the Dow Jones has added 10.4%, the S&P 500 10.1% and the Nasdaq 12.4%, each having tested new record highs over recent months.