By François Rimeu, Senior Strategist, Crédit Mutuel Asset Management

Crédit Mutuel Asset Management is an asset management company of Groupe La Française, the holding company of the asset management business line of Crédit Mutuel Alliance Fédérale.

The situation in the Strait of Ormuz remains at a standstill, with maritime traffic close to frozen. Yet, equity markets continue to display remarkable resilience. The reason is fairly simple and can be summed up in two letters: AI.

The earnings season has indeed confirmed the sector’s strong momentum, and above all, the exceptional profitability of semiconductor and memory (RAM) manufacturers. This theme is global and illustrates the fact that today, it is more important to be invested in the right (winning) sectors than to focus on geographic allocation. For example, clearly, it was better to be invested in Korea or the U.S. rather than in Europe, but more importantly, it was crucial to have selected companies like TSMC or ASML over sectors such as healthcare or consumer goods.

The question today is whether this trend will continue or whether it has gone too far. For now, the rise in these companies’ stock prices reflects improving earnings prospects, with valuations that are not fundamentally different from those seen two or three years ago. In fact, this observation can be extended to the majority of equity markets: the gains recorded this year are primarily driven by earnings growth rather than by higher valuations.

In the longer term, several questions arise, particularly that of circularity, i.e., the idea that one company’s spending becomes another’s revenue. We are referring here mainly to U.S. hyperscalers, which support an entire ecosystem. The rise in these expenditures, the return on which remains uncertain so far, is it sustainable over time? The question remains open.

To conclude on the topic of AI, it is also worth mentioning the upcoming IPO of SpaceX, whose valuation could reach $2 trillion, which is equivalent to 6% of U.S. GDP and would place it among the world’s 10 largest companies, all while remaining unprofitable. The figures are so large that today, anything related to AI is increasingly becoming a macroeconomic issue.

On the macroeconomic front, what stands out today is the stark contrast in economic momentum between Europe and the United States, as illustrated by the gap between U.S. and European economic surprise indices. The reasons are fairly straightforward: the United States is fully benefiting from the AI boom, which remains largely absent in Europe and is much less affected by rising energy prices.

Given that both regions face similar short-term inflation dynamics, one might question current monetary pricing, with markets anticipating three rate hikes in the Eurozone over the next twelve months versus only one in the United States. Starting interest rate levels are different, but the risk of higher energy prices spilling over to the broader economy seems much higher in the United States. The fiscal response, which has been reasonable so far, remains a key question regarding interest rate dynamics in the coming months.

Finally, a word on the situation in the Middle East: time is our enemy. The impact of rising prices has so far been manageable, but this rests on the assumption that the Strait of Hormuz returns to some degree of normal functioning soon. If the situation does not improve over the summer, a rapid drawdown in inventories would indeed create a major challenge for the oil industry.

In this highly uncertain environment, we maintain equity allocations close to our benchmarks, an overweight position in Eurozone bonds and a constructive long-term view on gold as well as industrial commodities.