Asian equity markets are expected to open higher, buoyed by a significant rally in technology stocks. This optimism stems from renewed speculation that the artificial intelligence (AI) trade, which has been a primary driver of the bull market, still has substantial room for growth. This resurgence follows a brief selloff in chipmakers, with the Nasdaq 100 index climbing approximately 1.5%. Investors are eagerly awaiting further validation of the AI trade, particularly after a strong sales forecast from Micron Technology Inc. last month, and will be looking to industry bellwethers for clues on AI demand and capital expenditure projections from hyperscalers.
The tech sector's recent volatility has prompted investors to seek stabilization. Mark Haefele at UBS Chief Investment Office highlighted that markets will assess whether recent pressure on hyperscaler shares alters the perceived trajectory for AI capital expenditure. Signs of intact spending plans would reassure investors about the durability of AI infrastructure demand. Conversely, any indications of caution could redirect focus to valuations, financing needs, and concentration risks. Despite recent fluctuations, analysts like Max Kettner at HSBC Holdings Plc suggest a "summer melt-up" is underway, noting that the decline in hyperscaler stocks in May and June was an overreaction.
Contributing to the positive sentiment are hopes for a robust earnings season, with the AI boom expected to deliver substantial profits for technology companies. Samsung Electronics Co. is a key focus, with analysts anticipating an 18-fold increase in profits for the April to June quarter, potentially reaching 86 trillion won ($56.35 billion). SK Hynix Inc. is also proceeding with its formal marketing process for a U.S. listing, further indicating strong activity in the chip sector. Broadcom Inc. saw a jump as it extended its partnership with Apple Inc. to 2031. South Korea's market, heavily influenced by AI demand and tight chip supplies, is up 92% for the year, with an additional 2.25% gain on Monday.
The broader market also benefited from easing inflationary pressures and a reduced likelihood of immediate interest rate hikes by the Federal Reserve. A softer U.S. payrolls report and declining oil prices, with Brent crude slipping to near four-month lows at $71.70 a barrel, have led markets to scale back expectations for a Fed rate hike. Futures now imply a 78% chance of a steady outcome at the July 29 meeting. The MSCI World Index rose 0.6%, the S&P 500 rose 0.8%, and the Dow Jones Industrial Average rose 0.2%, reflecting a generally optimistic outlook.
While the AI theme remains a dominant force, questions persist about the timelines for firms to see returns on their significant investments and whether current valuations are sustainable. Major tech companies like Alphabet, Amazon, Meta, and Microsoft have committed over $725 billion to the AI industry this year alone. Investors will closely scrutinize upcoming earnings reports for insights into companies' AI strategies and outlooks, especially given the considerable sums already allocated to the sector.
