The AI trade powers on, as luxury stocks surge

Key takeaways

• ASML eases fears about sustainability of AI trade
• The two-tier AI trade
• The US’s Goldilocks moment
• China growth disappoints
• US wealth powers sales at Europe’s luxury houses
• Move over China, there’s a new well-heeled customer in town

Oil prices are rising on Wednesday as the US naval blockade of the Strait of Hormuz is reinstated. The Brent crude oil price is higher by 2% this morning, it is now trading back above $86 per barrel, a one-month high. European stock futures are lower across the board, although US futures are pointing to gains later today, led by the Nasdaq, which is expected to extend its recent rally.

ASML eases fears about sustainability of AI trade

The performance of stock market indices are not telling the full equity market picture this week. For example, European stocks are struggling this week, and the Eurostoxx index is down 0.5%, even though AI-linked European stocks are soaring. ASML, Europe’s largest company and the world’s biggest supplier of chip-making equipment, reported sales growth of 21% last quarter to EUR 9.3bn, which was higher than forecast.

Net income was EUR 2.9bn, which also beat analyst expectations. The good news did not stop there, ASML expects sales growth of EUR 43bn – EUR 45bn this year, which is well ahead of forecasts of EUR 39.6bn. The company said that long term demand for its lithography machines that create semiconductor chips was so strong that it would raise its production capacity by 30% next year and may consider a similar increase in 2028. ASML is close to receiving all the sales orders that it needs for 2027 and is already getting many orders for 2028. This suggests that the AI boom is unlikely to slow anytime soon, since ASML is at the very top of the production pipeline. Signs that demand remains strong for the next two years may help to stem fears about the sustainability of the AI rally which is propping up an ever-greater part of the US economy, from macro growth to the stock market to bank earnings. ASML’s share price is higher by nearly 5% this morning.

The two-tier AI trade

News that ASML’s demand outlook is strong helped the Kospi, South Korea’s chip-heavy index, to rally more than 6% on Wednesday, although it is down 2% so far this week after a sharp sell off on Monday. It also shines a light on the woes at IBM. It reported on Tuesday that sales would be lower for Q2 due to some cancelled orders for its software and mainframe deals, as customers pivoted their budgets to secure AI hardware like servers and memory, ahead of expected price increases for these products. This caused IBM’s share price to plunge nearly 25%, its worst single day sell off in the company’s 115-year history. The AI stock market rally has a ‘winner takes all’ mentality right now. This means that AI laggards, or companies that look like they will be left behind by the AI boom, get sold off, since they are seen by traders as being surplus to requirements in the current economy. AI uncertainty remains one of the major themes for markets as we lead up to some key tech earnings reports in the coming weeks. If you are a tech firm, and you can’t win at AI, either through the production of AI-necessary components, or investments in AI, then you are at risk.

The US’s Goldilocks moment

This does not mean that every non-AI sector is at risk of collapse, far from it. The June US CPI report suggests that the US economy is having a goldilocks moment, and fears about rate hikes from the Fed in July and September could be put to bed. This may help the global stock market rally to continue, and even broaden out, after a weak start to the month for consumer staples, consumer discretionary and healthcare stocks.

China growth disappoints

Elsewhere, growth in China was weaker than expected for Q2, coming in at 4.3%, missing expectations of 4.5%, and below Beijing’s target range for growth between 4.5% – 5%. The data highlights a growing divergence in China between the robust state-sponsored tech sector, which is a major priority for Beijing right now and is growing at pace, compared with a slowing domestic economy. There is a deepening property downturn, property investment collapsed by another 18% in the first half of this year, and consumer spending also remains weak, rising a mere 1% last month. Factories and the non-tech manufacturing sector are also struggling under the weight of the higher energy prices caused by the war in Iran. This data weighed on Chinese equities this morning, and it is also having a mildly negative impact on European indices, including the Dax, as industrial stocks sell off. However, if China announces any stimulus measures to boost the economy in the second half of this year, it could be another boost to the global stock market rally.

US wealth powers sales at Europe’s luxury houses

There was also some interesting data from Swiss luxury company Richemont, which reported a 20% increase in sales last month of $7.24BN, beating analyst estimates of $5.9bn. The company reported a 27% increase in sales in the US, up from 18% in Q1, as US consumers benefit from wealth generated by stock market gains and from high-earing tech employees. Sales in Asia rose by 21%, and in Europe sales were 11% higher.

Move over China, there’s a new well-heeled customer in town

This is a solid set of results that also highlight the shifting patterns of global consumption. Not so long ago it was Asian consumers, particularly in China, who propped up global luxury sales. However, these days the US consumer is the chief purchaser of luxury items. Richemont is benefitting from the extremes of the luxury sector. It caters for high end consumers who buy the most expensive jewelry, and the affordable luxury consumer.

It sells the world’s most prestigious watch brands including Piaget and Vacherin Constantin. It also sells Van Cleef and Arpels, famous for its affordable luxury Alhambra range, which is popular with celebrities and influencers. Richemont’s results tell us a story about how US wealth has surged in the last 5 years, and why US consumers are now key for the luxury market. These results also bode well for luxury names, and Kerring, LVMH and Hermes are leading the Cac 40 in Paris higher today and are all up more than 2%. Overall, AI enthusiasm is still the key market theme on Wednesday, even if the effects are not felt evenly. A less hawkish Fed would be a welcome respite for less-loved sectors of the global stock market, and the dollar remains the weakest currency out of the majors on Wednesday.

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