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AI companies are anticipated to drive significant returns in the short-term (6-12 months), despite potential inflationary pressures in the near-term due to capital expenditures.
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Interest rates are expected to remain elevated for a longer period, influenced by persistent inflation and structural changes in the global economy.
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BlackRock remains neutral in their largest portfolio allocation. Falling inflation and coming Fed rate cuts can underpin the rally’s momentum.
BlackRock's weekly commentary has shed light on the ongoing market rally driven by significant investments in artificial intelligence, noting that while the AI trend continues to propel the S&P 500 and Nasdaq Composite to notable gains, the underlying capital expenditures on AI are expected to be inflationary in the short term. The surge in market value is exemplified by Nvidia, which yesterday after market close became the world's most valuable publicly traded company, surpassing tech giants Microsoft and Apple. This valuation spike is credited to Nvidia's pivotal role in the AI-driven market ascendance, coupled with Apple's recent achievements with its Apple Intelligence AI system, highlighting the robust influence of AI on market dynamics.
The investment in artificial intelligence (AI) is seen as a double-edged sword: while it promises to boost long-term productivity, the initial capital expenditure for AI technologies is expected to be inflationary in the near term. However, certain AI companies are still expected to drive significant investment returns over the next 6 to 12 months.
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The U.S. economy shows robust market activity with U.S. stocks reaching record highs and an unexpected fall in the May CPI, indicating a moderation in core services inflation. Despite these optimistic signs, the Federal Reserve has adopted a cautious stance, revising its policy to anticipate only one rate cut this year. This careful approach reflects a broader understanding that economic indicators might not fully capture the persisting inflationary pressures and the need for continued high interest rates. The European Central Bank, similarly, has made rate adjustments, although not signaling a deep rate-cutting cycle ahead.
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