As global energy prices are rising again, largely driven by geopolitical tensions and uncertainty surrounding the Strait of Hormuz, short-term inflation expectations have also increased sharply. This has, in turn, triggered significant changes in the expected path of central bank policy.
In the US, investors have gone from expecting around three interest-rate cuts to pricing in two to three rate hikes by year-end.
Gustav Helgesson writes that SEB does not expect energy prices to fall meaningfully before the US midterms on 3 November, as Iran has little incentive to ease pressure before the election.
Resilience – despite rising energy prices
While higher energy prices and interest rates remain important downside risks, the global economy has so far been more resilient than expected.
A key factor has been the investment boom related to sectors such as AI, defence, and infrastructure. In September, manufacturing and services showed strong growth, too.
According to Gustav Helgesson this could indicate that the investment boom is beginning to spill over into the wider economy.
What’s next for AI investments?
Massive AI investments are now consuming cash faster than many large tech companies can generate it. Negative free cash flow means that some companies will need to increasingly rely on banks and capital markets for financing.
Investor attention is therefore gradually shifting from growth potential to financing risk. With AI-related spending driving investment in data centres, infrastructure and the broader economy, any slowdown could have implications far beyond the technology stocks themselves.