Global financial markets are demonstrating unexpected resilience against surging bond yields and elevated oil prices, largely propelled by the burgeoning artificial intelligence (AI) boom. US President Donald Trump recently championed AI, publicly dismissing concerns about its societal impact during a live event with Nvidia CEO Jensen Huang. Nvidia, a key designer of graphics processing units and chips essential for AI and data centres, is at the core of this growth. Trump’s robust defence of AI, which he declared “bigger than the internet,” is seen as a strategic effort to safeguard Wall Street’s performance, a crucial metric for his political standing.
The US 10-year Treasury yield recently climbed past 5 per cent, a level not seen consistently since 2007, signaling tighter financial conditions. Simultaneously, market expectations for further US Federal Reserve interest rate hikes have intensified, alongside Brent crude prices soaring to US$109 a barrel amid Middle East instability. Historically, these factors would typically pressure equity markets. However, the S&P 500 Index has shown notable stability. UBS’s Arend Kapteyn suggests this defiance stems from a historic tech sector earnings boom, primarily driven by AI companies proving less susceptible to interest rate movements, allowing markets to largely discount rate hikes and bond yields.
The AI sector’s profound influence on the US economy is significant. UBS estimates AI spending contributes approximately 40 per cent of current US economic growth, with a similar portion attributed to wealthy households whose equity wealth has surged due to AI. With non-AI business investment at recessionary levels, the US economy faces an “AI or bust” scenario. This reliance creates substantial vulnerability: a material slowdown in the AI boom would expose the US sharemarket to a severe correction, impacting global markets, particularly Asian manufacturers of crucial AI components. Recent dips in AI-related stocks, including Nvidia and SK Hynix, underscore this potential fragility for economic and political stability.
