Equity markets are entering a pressure test, pitting the artificial intelligence boom against the realities of the global economy. Tech giants like Microsoft and Meta Platforms, the owner of Facebook and Instagram, have reported strong earnings, driven by substantial investments in AI infrastructure. However, escalating trade tensions and concerning employment figures are casting shadows over market sentiment.
Recent global market unease stems from Donald Trump’s tariff policies, particularly impacting European economies like Germany and France. A weaker-than-expected US jobs report further fuelled anxieties, with only 73,000 jobs added in July, significantly below the anticipated 100,000. Revisions to previous months revealed a substantial reduction of nearly 260,000 jobs, painting a concerning picture of the labour market. This led to Wall Street shudders, with the S&P 500 declining.
Despite broader economic concerns, tech earnings remain robust. Goldman Sachs reports that the ‘magnificent seven’ tech companies are on track to increase earnings by 26 per cent in the second quarter. The other companies are more exposed to Trump’s economy: cracks in the labour market, slower growth and a growing hit to consumer spending power from the biggest tax increase in America in 90 years, in the form of tariffs that are at least five times higher than they were last year. Australian fund managers, heavily invested in local tech stocks, mirroring the US trend, are particularly exposed to market volatility.
As the August reporting season approaches, investors must weigh the promise of AI against potential economic headwinds. The market’s ability to sustain its upward trajectory hinges on whether it can continue to overlook the impact of tariffs on the real economy. The upcoming Nvidia earnings report will be critical in determining market direction, but investors should remain wary of potential air pockets as the global economic outlook remains uncertain.
