AI has been known to hallucinate. So have financial markets
Stock markets are booming on the assumption that US tech giants will deliver, but as liquidity becomes scarce, a reality check will ensue
Global stock markets are creating seemingly unstoppable wealth for investors. Last month, bull investor Ed Yardeni raised his year-end S&P 500 Index target from 7,700 to 8,250. US companies are still recording bumper profits, driven by artificial intelligence (AI), financial and consumer giants.
Let’s connect some dots in the boom or bust noise that could cast doubt on market enthusiasm.
First, the doomsayers are flagging warning signals. According to the World Bank’s projections, global gross domestic product growth will slow to 2.5 per cent in 2026, down from 2.9 per cent last year, mainly due to the conflict in the Middle East and higher oil prices. Economist Steve Hanke has drawn attention to debt levels and monetary policy in advanced economies, saying warning signs are flashing red.
On Wednesday, the US Federal Open Market Committee under its new chairman Kevin Warsh held the federal funds rate at the current 3.5-3.75 per cent range, but took what appeared to be a hawkish stance on maintaining price stability amid strong productivity growth.
With 30-year US Treasuries yield hovering around 5 per cent per annum, even as consumer prices spiked to 4.2 per cent in May, the average interest cost of the US’ US$39 trillion in sovereign debt is roughly 3.4 per cent per annum or around US$1 trillion. At the end of last year, interest payments were nearly 19 per cent of federal revenue.