Weekly market commentary

Biggest lift from net exports since pandemic
Value of China's exports, 2015-2025

Last week’s big developments – the U.S. and China reaching a trade truce and mega cap tech companies upping planned AI buildout spending – highlight how mega forces are playing out in real time. The truce shows how immutable economic laws – supply chains can’t be rewired overnight – can limit policy outcomes even as strategic competition between the U.S. and China deepens. Yet even with all the tariffs and threats this year, China’s export engine has stayed remarkably strong – partially due to countries front-loading imports earlier this year before tariffs took effect. See the chart. Exports have served as a key growth driver for China’s sluggish economy. The net export contribution to GDP growth this year is on track to be the largest since 2020 when demand for its goods soared during the pandemic – and excluding that, the largest in two decades, according to Haver Analytics data.

China has suspended export controls on rare earths - a vital input across several technologies including AI infrastructure – for a year in return for the U.S. reducing tariffs and easing measures on ports and shipbuilding. We think this should bring some near-term stability to U.S.-China relations even amid the ongoing competition and broader geopolitical fragmentation rewiring supply chains. With its new five-year economic plan unveiled this week, Beijing is focusing on “self-reliance” in developing its economy and achieving independence from the U.S. and rest of world – especially on technological developments such as quantum computing and nuclear fusion. China’s economy is still struggling with a weak housing market, low consumer confidence and structural challenges, notably a fast-aging workforce. That’s why we stay neutral on Chinese stocks overall but favor selective exposures such as the AI theme that has helped Hong Kong-listed Chinese shares – concentrated in tech – surge 28% this year, outperforming the U.S. so far.

Trade truce and tech bets shape global dynamics

Last week also reinforced the AI mega force is a key driver of stocks. Alphabet, Microsoft, and Meta together spent about $60 billion on capex last quarter – a major step-up - and all flagged higher spending ahead as they pour money into chips and data centers, according to earnings reports. Yet we are seeing more differentiated share performance and investor focus on how companies are earning revenues tied to this investment – and how they are financing it as these companies become more capital-intense, highlighted by Meta’s upsized $30 billion bond sale. We stay overweight U.S. equities on the AI theme.

We’ve seen the AI theme broaden to a wider array of markets this year. Case in point: South Korean shares have surged 70% in local currency terms, especially with its chipmakers signing up for deals with OpenAI, while Taiwan’s local index has gained 23%. Copper has jumped nearly 30% to all-time highs as a key input to the wiring across mega forces, with power grids needing upgrades or expansion to drive AI data centers amid constrained copper supply. Private markets including infrastructure – which are complex and not suitable to all investors – are increasingly core to financing the AI buildout.

Our bottom line

Mega forces – notably geopolitical fragmentation and AI – are a key investment lens for the short-term, not just the long term. We stay overweight U.S. stocks on the broadening AI theme, with risk appetite supported by Fed rate cuts.

Market backdrop

The S&P 500 climbed 3%, supported by strong tech earnings in a bumpy October and is set to notch its longest run of monthly gains since 2021. U.S. 10-year Treasury yields rose to near 4.10% after the Federal Reserve cooled expectations for a December rate cut. We think the Fed will cut in December given that the central bank signaled as much in September – but the shift highlights committee divisions. Gold rebounded to around $4,000 after sliding from all-time highs.

The ongoing U.S. government shutdown - now the second-longest in history - will likely delay September trade data. That leaves markets without a key indicator of tariff impacts before the U.S. and China struck a truce on trade. China trade will gives a snapshot on how its exports have held up heading into the truce. China inflation data will show whether Beijing's stimulus efforts are helping pull the economy out of deflation. The Bank of England is expected to keep rates on hold.

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