Chinese setback, AI woes, and ECB decision

AI: Are Salesforce and Dell Technologies earnings a canary in the coal mine?

No week passes without something new on AI. This week earnings results from Salesforce and Dell Technologies negatively surprised investors questioning whether the massive investments in generative AI workloads are in fact translating into higher growth rates for the wider technology ecosystem. These relevant questions came as DeepMind CEO and co-founder Demis Hassabis recently talked about that generative AI focusing on content creation is diverting attention and ressources away from the area of AI research that will matter in the long run. This week, Nobel laureate Paul Romer also talked about the risks of the current AI enthusiasm might be creating a bubble.

Next week: ECB rate decision and CrowdStrike earnings

• ECB rate decision: ECB is set to cut its policy rate Thursday next week with the market assigning a 97% probability of a cut. ECB speakers have effectively talked themselves into a corner this year which would mean loss of integrity if ECB did not cut its policy rate. We have argued for some time now that the ECB might be headed into a policy mistake. The key dynamic to understand is that the European economy has bounced back regardless of what the ECB sees as a restrictive policy rate which indicates that it was not the policy rate that weakened the European economy in the first place. It was the energy shock due to the war in Ukraine and the lagged effects of high inflation. The global economy has entered into an expansion phase with Europe’s economy also accelerating and inflation surprising to the upside (Eurozone core CPI today came out at 2.9% YoY vs est. 2.7% YoY). If the ECB chooses to cut rates into this cycle they might add to inflationary pressures medium term prolonging the inflation problem. The issue is that the ECB remains to confident in its econometric models on inflation and underestimates the future impact on inflation from fiscal expansion related to military expenditures and demographics which will keep labour market tight. The bond market seems to be having the same thinking with the German 10-year yield at 2.7%, the highest level since November 2023, which indicates that the bond market is worried that the ECB will add to inflationary dynamics longer term. So by cutting the interest rate the ECB might achieve looser financial conditions for those in the economy that refinance regularly such as consumer credit and high yield bonds, but financial conditions for longer term financing could actually go up.
  
  
• Earnings to watch: Key earnings next week are CrowdStrike (Tue), Lululemon (Wed), and Inditex (Wed). CrowdStrike experienced a rough week which raises the stake for not only CrowdStrike but also the entire cybersecurity industry going into CrowdStrike earnings. Analysts expect CrowdStrike to report revenue growth of 31% YoY to $905mn in the quarter that ended in April underpinning the picture that cloud-based providers are seeing higher growth rates than firewall vendors such as Palo Alto and Fortinet.

Previous weekly equity market updates

• Nvidia earnings, electrification boom, and bubbles
• New all-time high on speculative stocks comeback