Equities: The AI and obesity rally is defying gravity

Equities: The AI and obesity rally is defying gravity

Quarterly Outlook
Peter Garnry

Chief Investment Strategist

Summary:  Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.


How much can the rubber band be stretched?

A benign economic backdrop combined with investor excitement over generative artificial intelligence (AI) and the new class of obesity drugs from Eli Lilly and Novo Nordisk have set in motion a speculative fever. The result is nothing but stunning. In no time, Nvidia has been catapulted to become the third most valuable company in the US worth $2.2trn and Novo Nordisk has become Europe’s most valuable company worth $600bn. Next to these stories there is an entire ecosystem of AI related companies, and obesity and biotechnology companies thriving on this boom in innovation. And not to forget the Magnificent Seven

Excitement always drive greed and extrapolation of expectations to unsustainable levels. This time is no different. As of February 2024, the US equity market hit valuation levels not seen since the dot-com and 2021 technology bubbles. Historically, the current equity valuation has led to low equity returns after subtracting inflation over the subsequent 10 years. Since December 2021, US equities are only up 5.2% and US CPI Index is up 10.6% as of January 2024. With US equities at their current equity valuations it is not the time to get greedy. In fact, investors should think about reducing their US equity exposure. Of course, we could be horribly wrong and the rubber band stretches even further.

No where to hide, or what?

The stretched valuation in US equities makes us tactically go neutral against a strategically positive view on US equities. While many negative things can be said of Europe the fiscal valves are being opened and the European equity market has some catchup to do relative to US and Japanese equities so our view is that a geography rotation into Europe could happen in Q2. We maintain negative view short term on Japanese equities due to JPY risks and BoJ pivot on policy rate.

On a sector level we are positive on energy (great value and good inflation hedge), health care (strong growth relative to valuation), and financials (favourable valuation and still good operating environment). We are negative on industrials (low growth and expensive), information technology (too much speculation and hype in the short term), utilities (low momentum and negative outlook), and real estate (low momentum and expensive).

Conviction: European defence stocks as US election looms

This year is biggest election year in modern history with the US election on 5 November being the most important election and especially for Europe. Biden and Trump are polling on par for the general election in the two most recent large polls, and Trump is questioning NATO and military support for Europe, keeping European politicians anxious with a more assertive Russia.

Regardless of whether Trump wins or not his comments about NATO have set off alarm bells in Europe’s capitals and mobilized efforts to dramatically increase military spending. Poland is already spending 4% of GDP and is willing to spend more. With military spending targets presented in Europe to go well beyond 2% of GDP a lot of growth is coming “Europe first” military spending benefitting European defence companies. Rheinmetall, Germany’s largest defence company, is expected to grow revenue by at least 18% annualised over the next five years. One of our biggest convictions is European defence companies.

How can investors get exposure to defence stocks? Investors can get inspiration from our defence theme basket or check out the various ETFs such as Future of Defence UCITS ETF or VanEck Defence UCITS ETF.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992