AI and Markets: What’s Changing for Investors?

The corporate fundamentals have not changed, yet this week equity markets appear to be adopting a different demeanor. Are investors simply taking a breather, or is the party over? In most cases, it is the sentiment that has shifted rather than the underlying reality, and we believe investors will soon find reasons to re‑enter the market—unless something calls the strong earnings‑revision cycle into question.

Few doubted that building AI‑linked data centers would require fresh capital, but now that financing plans have been unveiled, investors are once again scrutinizing the scale of the outlay. Capital expenditures for AI can be enormous, but downstream effects are benefiting a broad spectrum of companies and making a significant contribution to GDP.

Risks remain evident. While index volatility has spiked only this week, individual‑stock volatility has been elevated for much of the year. A cooling off in the past two weeks is not necessarily a negative sign: some single‑stock price movements recall previous boom‑and‑bust cycles. Naturally, a series of speculative IPOs with bold valuations could reinforce those parallels, but we anticipate a resurgence of investor appetite as long as the strong earnings‑revision cycle persists.

Lewis Grant, Senior Portfolio Manager for Global Equities, Federated Hermes