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Podcast: CIO's Wayne, Jon and Teck on the US shutdown, FX, and gold (13 min)

US equities rose to a record high at the start of the week after the AMD-OpenAI deal's announcement added fuel to the artificial intelligence (AI) momentum that continues to power the market. The S&P 500 rose for its seventh consecutive trading day, the longest winning streak since May. The equity benchmark has climbed 14.6% year-to-date.

The deal involves the chipmaker supplying OpenAI with 6 gigawatts’ worth of advanced graphics processing units (GPUs) over multiple years, while OpenAI will have the ability to acquire up to 10% of AMD's shares at just USD 0.01 per share, depending on the project hitting certain milestones. It marks the latest in a string of pacts announced by OpenAI as the ChatGPT maker builds out more computing capacity. Last week, OpenAI signed letters of intent with Samsung Electronics and SK Hynix to buy memory chips, after it struck separate deals with NVIDIA, Oracle, and Broadcom over the past month.

With hundreds of billions in investment commitments and the bull market on track for its three-year anniversary, fears of an AI bubble that could rival the dotcom era are mounting.

But there have been warnings of a bubble for almost as long as the AI boom has been in full swing. In our view, a period of consolidation would not come as a surprise after such a strong recent run, but we believe the equity rally is underpinned by solid fundamentals that should continue to support the market.

Tech companies should earn attractive returns as AI adoption accelerates further. The adoption of AI has grown at a much faster pace than other technological advances, and we think the next phase of accelerated growth will come soon amid further innovation. With AI solution providers already making good progress converting usage into revenue, we believe monetization should pick up further as adoption accelerates. This should allow tech companies to ultimately earn attractive returns on the investments they are currently making. Indeed, we expect global AI revenues to grow at a 41% compound annual growth rate through 2030, to USD 2.6tr.

The macro backdrop is supportive of earnings growth. The US economy remains resilient; in the second quarter, it grew at the fastest pace (3.8%) in nearly two years. With household balance sheets still strong and consumer spending holding up, we expect the expansion of the US economy to support corporate earnings growth. We estimate S&P 500 earnings per share to increase by 8% this year and 7.5% in 2026. We also expect additional interest rate cuts from the Federal Reserve in the coming months. Moreover, the macroeconomic effects of government shutdowns have historically been minimal and quickly reversed. While the administration has threatened mass layoffs of federal workers, any permanent firings would likely face significant legal challenges.

Other structural growth trends are also likely to drive long-term gains. Innovation remains a key driver of long-term equity performance, and alongside AI, we expect the electrification of the global economy and demographic shifts to offer significant opportunities. OpenAI’s recently announced deals are adding to the electricity and grid infrastructure demand that is accelerating globally, while Pfizer’s agreement with US President Donald Trump has boosted investor sentiment in a sector that is underpinned by growing demand to treat chronic diseases.

So, with price-to-earnings (P/E) ratios for today’s tech giants still well below those of the tech firms at the peak of the dotcom bubble, we think the bull market remains intact. Investors looking to manage timing risks should consider phasing in and using market dips to add exposure to our preferred areas, including the Transformational Innovation Opportunities of Artificial intelligence, Power and resources, and Longevity.