Global equity markets climbed over the past weeks as investors continued to embrace the artificial intelligence investment boom despite rising inflation pressures, elevated oil prices and persistent geopolitical uncertainty in the Middle East.
Strong corporate earnings, particularly from major United States technology companies, helped propel equity benchmarks higher as investors bet that AI-driven growth would continue supporting economic activity and company profits.
According to FactSet Earnings Insight, U.S. equity markets rallied as approximately 85% of S&P 500 companies had reported quarterly earnings by 8 May, with nearly 84% of those firms exceeding analyst expectations.
Information technology stocks led gains across the S&P 500 Index, supported by strong momentum in companies tied to AI infrastructure and consumption, while energy and utilities lagged.
Morningstar analysts said the latest reporting season confirmed that artificial intelligence remained the dominant theme driving markets.
Big Tech earnings continue to impress
Morningstar’s Vesna Peroska said the major technology companies had largely exceeded expectations.
“Coming into earnings season, the focus had really been on the big tech stocks, and they haven’t disappointed,” Peroska said.
“The standout was Alphabet, where they managed to grow their Google revenues after strong growth last year. That was received very well by the market, and the company performed quite well after that. Alongside Alphabet was Amazon, another business that performed strongly and has been monetising its AI investment quite effectively.”
However, investor reactions were not universally positive across the sector.
“On the other side, despite reasonable announcements, Microsoft and Meta were met with a bit more disappointment or scepticism from the market,” Peroska said.
“While all of these businesses announced growing AI capex, Meta and Microsoft weren’t rewarded for it. The concern is whether they can continue monetising that investment, or whether there’s a clear runway for returns.”
Peroska noted that AI investment benefits were increasingly spreading beyond the technology sector itself.
“Across industrials and utilities, there are signs that the benefits are broadening out across the economy,” she said.
AI spending reshapes investment strategies
Morningstar strategist David Sekera said the AI buildout boom continued to dominate market positioning and sector performance.
“The AI-buildout boom remains full speed ahead,” Sekera said.
“This earnings season, expectations for companies most closely tied to the AI-buildout boom were high, and these companies did not disappoint.”
Morningstar said the U.S. stock market was trading at a 5% discount to fair value estimates at the end of April, with technology remaining among the most undervalued sectors despite the recent rally.
Sekera said Morningstar’s “barbell” investment strategy, which combined value-oriented energy stocks with growth-focused technology shares, had performed as intended amid increased market volatility.
Growth stocks rebounded strongly during April, with technology shares surging more than 17%, while energy stocks retreated as oil prices moderated from recent highs.
Morningstar said the technology sector still traded at an 11% discount to fair value, highlighting opportunities in companies tied to AI infrastructure and semiconductor demand, including Nvidia and Broadcom.
However, Sekera warned investors against indiscriminately chasing AI-related shares.
“The race to build out ever-increasing generative capacity is the modern-day version of the gold rush,” he said.
“Looking forward, investors need to be judicious in their decisions about which AI stocks to invest in.”
Labour market remains resilient despite warning signs
In the United States, economic data painted a mixed picture of resilience and emerging weakness.
T. Rowe Price noted that initial jobless claims rose modestly to 200,000 in the week ended 2 May but remained below consensus expectations. Continuing claims fell to 1.77 million, the lowest level since 2024.
Nonfarm payrolls increased by 115,000 in April, significantly ahead of expectations for 62,000 jobs, while payroll growth for March was revised higher to 185,000.
Healthcare, transport and retail sectors drove much of the employment growth.
The unemployment rate held steady at 4.3%, although labour force participation fell to its lowest level since October 2021.
At the same time, layoff announcements rose 38% in April from the previous month, with technology companies accounting for the largest share of job cuts as firms increasingly pointed to AI-driven restructuring.
Labour productivity growth also slowed during the first quarter, although annual productivity gains remained relatively healthy at 2.9%.
Consumer confidence weakens as inflation rises
Despite solid employment data, consumer sentiment deteriorated sharply.
The University of Michigan’s consumer sentiment index dropped to 48.2 in early May, marking the lowest reading on record.
Survey respondents increasingly pointed to higher petrol prices and tariffs as key concerns.
Peroska said inflation data from both the United States and Australia had surprised to the upside.
“The inflation data from the U.S. and Australia over the past week has surprised to the upside,” she said.
“It shows that oil price increases are clearly filtering through into inflation.”
She warned that consumers were increasingly feeling the effects of higher living costs even as labour markets remained relatively firm.
“Despite relatively strong employment and wage growth in the US—and similar employment conditions in Australia—consumer sentiment hasn’t reflected that macro strength,” Peroska said.
“That often signals what might come next.”
Central banks face difficult balancing act
Inflation concerns also complicated the outlook for global monetary policy.
JPMorgan Asset Management said the Reserve Bank of Australia’s three rate hikes this year demonstrated that policymakers had front-loaded tightening to contain inflation pressures.
The asset manager warned that ongoing disruptions in the Strait of Hormuz could keep oil prices elevated longer than expected, prolonging inflationary risks.
“The RBA’s main concern is whether temporary commodity price shocks will lead to persistent underlying inflation, embedding higher inflation in the economy,” JPMorgan said.
Peroska said supply-driven inflation created difficult conditions for central banks.
“However, when inflation is driven by supply constraints—like we’re seeing with oil—monetary policy is less effective,” she said.
“There’s a saying that high prices cure high prices, but the demand destruction required to achieve that can be quite damaging.”
“So the RBA faces a balancing act. They need to manage inflation pressures without pushing the economy into recession.”
In Europe, the European Central Bank also signalled that further tightening remained possible.
Joachim Nagel, president of Germany’s Bundesbank and an ECB policymaker, said the central bank must be prepared to act again unless inflation improved substantially.
Eurozone producer prices rose 3.4% month on month in March, marking the sharpest increase since 2022 as energy costs surged.
EU markets supported by earnings despite tariff fears
European equity markets ended the week modestly higher despite renewed concerns around trade tensions.
The STOXX Europe 600 Index gained slightly as easing Middle East tensions and generally positive corporate earnings initially supported sentiment.
However, markets weakened later in the week after President Donald Trump threatened “much higher” tariffs on the European Union unless tariffs on U.S. goods were reduced to zero.
Germany’s DAX edged 0.19% higher while Italy’s FTSE MIB rose 2.16%. France’s CAC 40 was largely unchanged, while the UK’s FTSE 100 declined 1.26%.
Germany also reported a stronger-than-expected 5.0% increase in factory orders during March, driven by demand for electronics and engineering products linked to AI infrastructure investment.
Japan rallies as AI enthusiasm strengthens
Japanese equities surged following the Golden Week holiday closure.
The Nikkei 225 jumped 5.38% to record highs while the broader TOPIX Index advanced 2.70%.
Technology and semiconductor shares led gains as investors continued rotating into AI-linked growth stocks.
Lower oil prices during parts of the week also eased concerns around Japan’s energy import costs.
Meanwhile, real wages in Japan rose for a third consecutive month, adding to expectations that the Bank of Japan may continue gradually normalising monetary policy.
The yen remained volatile amid speculation about possible intervention by Japanese authorities to stabilise the currency.
Kospi rally fuels 12,000 bull-case calls
South Korea’s benchmark KOSPI index has sparked increasingly bullish forecasts after breaking through the 7,800 level, with some strategists now projecting the index could climb as high as 12,000 this year.
However, concerns are also mounting over rising concentration in semiconductor heavyweights and speculative buying behaviour during the sharp rally.
According to reporting from the Seoul Economic Daily, Hyundai Motor Securities raised its year-end KOSPI target to 9,750 points and projected the benchmark could potentially reach 12,000. The brokerage had previously set an upper target of 7,500 in February.
The upgraded outlook reflects expectations for stronger long-term semiconductor earnings, an AI-driven bull market and increasing retail investor participation.
“The 12-month forward price-to-earnings ratio (PER) for the KOSPI semiconductor sector currently stands at 5.17 times, below the 20-year average of 10 times,” analyst Kim Jae-seung said.
“As hyperscalers continue to expand their capital expenditure (CAPEX) next year and long-term supply agreements (LTA) increase, earnings for domestic semiconductor companies will rise, and the forward PER could climb to 8 times, the level currently applied to Micron in the U.S.”
Brokerages and foreign investment banks have accelerated upgrades to their KOSPI forecasts as the rally gathers momentum.
Daishin Securities lifted its target to 8,800 from 7,500 within two months. “From late February through the 6th of this month, the KOSPI's net profit forecast rose 48%, with semiconductors surging 74% and driving the level-up,” analyst Lee Kyoung-min said.
“Earnings forecasts for chemicals, energy, and secondary batteries have also been significantly revised upward amid geopolitical risks.”
Global investment banks echoed the bullish sentiment. JPMorgan projected a KOSPI target of 10,000 in its bull-case scenario, while Goldman Sachs lifted its target to 9,000 after previously upgrading it from 7,000 to 8,000 only weeks earlier.
“Regardless of whether Middle East conflict negotiations are resolved, commodity prices will remain above pre-war levels, and a stagflation environment is likely to persist,” JPMorgan said. “We recommend increasing exposure to artificial intelligence (AI) and security sectors regionally, and Korea is a market with significant exposure to both areas.”
Still, JPMorgan warned that rising labour costs linked to the recent labour-management dispute at Samsung Electronics could reduce operating profit by between 7% and 12%.
Some analysts have urged caution over the pace and concentration of the rally. Bloomberg, in a column titled “Korea's Chip Stock Rally Is Masking Market Vulnerabilities,” said gains in Samsung Electronics and SK hynix accounted for the bulk of the market’s advance.
“Most of the KOSPI's 78% gain this year has come from Samsung Electronics and SK hynix, and excluding the two stocks, the KOSPI's gain falls to around 30%,” Bloomberg noted.
“For the KOSPI to establish itself as a long-term wealth-building vehicle, it needs to reduce its dependence on specific sectors and broaden the investment base.”
China markets buoyed by trade optimism
Chinese equities also advanced during the shortened trading week.
The CSI 300 Index rose 1.3%, while Hong Kong’s Hang Seng Index gained 2.4%, led by technology and consumer shares.
Markets were supported by hopes that talks between President Donald Trump and Chinese President Xi Jinping would help maintain stability in trade relations.
Chinese services activity also expanded faster than expected in April, suggesting domestic demand remained relatively resilient despite ongoing uncertainty around tariffs and weaker export demand.
However, holiday spending data highlighted lingering caution among Chinese consumers.
While domestic travel volumes increased during the May Day holiday period, spending per trip edged lower from a year earlier.
BlackRock says markets are pricing both growth and risk
BlackRock said markets were not disconnected despite the simultaneous rise in equities, oil prices and bond yields.
“We see no disconnect between record U.S. equities prices and elevated oil, commodities and yields,” the firm said.
“Markets are pricing both AI-driven growth and the impact of the Middle East supply shock.”
BlackRock argued that the scale of AI-related investment was offsetting the economic drag typically associated with geopolitical shocks and higher energy prices.
The firm noted that expected first-quarter S&P 500 earnings growth had climbed to approximately 28%, while spending on AI infrastructure could reach as much as US$725 billion this year.
Still, BlackRock warned that persistently high inflation and rising long-term yields remained key risks for markets.
“A prolonged closure would likely shift the balance,” the asset manager said in reference to the Strait of Hormuz disruption.
“It would lift inflation and rates enough to start weighing on valuations and tighten financial conditions, ultimately challenging both risk assets and the pace of the AI buildout.”
For now, however, investors continue to favour growth-oriented sectors as the AI investment cycle remains the dominant force shaping global financial markets.
