A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

U.S. and world stocks touched new highs on Monday, as artificial intelligence fever continued to outweigh the prolonged U.S.-Iran impasse. The ceasefire is fragile and hopes of a lasting deal appear to be fading, but for now, tech-led earnings optimism is proving to be a powerful force.

In my column today, I look at stock market concentration, which is near record levels in the U.S. and across emerging markets. Should investors be worried? Not necessarily, although it could get messy once the drawdown finally gets underway. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

Data refreshes every time you open this email. For more U.S. market news, click here. Please send any feedback to morningbid@thomsonreuters.com.

High, high, high

U.S. and global stocks are powering to fresh highs, even though oil prices and bond yields are climbing too. There's an assumption that global supply chain disruption and rising energy and borrowing costs should cool the equity frenzy, but that's not necessarily the case.

The AI boom is offsetting the drag on growth from the global supply shock, and energy markets are still relatively sanguine that the Strait of Hormuz will reopen soon. BlackRock analysts remain bullish: "We see no disconnect between record U.S. equities prices and elevated oil, commodities and yields. Markets are pricing both AI-driven growth and the impact of the Middle East supply shock. We stay pro-risk as a result."

* China whirl

Attention turns to Beijing, and the U.S.-China summit later this week between Presidents Donald Trump and Xi Jinping. Traveling with Trump is an entourage of executives from Tesla, Apple, BlackRock and several other U.S. corporate titans. Is this show of economic strength intended to intimidate Xi, perhaps? 

China's latest 'data dump', meanwhile, showed surging export growth, a widening trade surplus and rising price pressures in April, suggesting the economy is moving out of disinflation. But unemployment ticked up and retail sales were disappointing.  

* Funding AI

Big tech's borrowing spree to fund the AI buildout is deepening and spreading, with Alphabet disclosing plans for its first bond sale denominated in Japanese yen and Amazon preparing its debut Swiss franc offering.

The currencies are noteworthy - they are traditionally the lowest-yielding G10 currencies, making it a relatively cheap option for the borrowers. Swiss policy rates right now are zero. It also diversifies the megacaps' investor base. But at the end of the day, cash reserves are dwindling and debt is rising. Pressure on the mega AI capex to pay off is growing. 

As the artificial intelligence boom accelerates, stock market concentration is reaching historic proportions – and not just in the U.S. where tech megacaps like Nvidia) opens new tab and Alphabet dominate. Increasingly, top-heavy indices are a feature of global equity markets, not a bug.

The rise of the "Magnificent Seven" U.S. tech giants has amplified equity market concentration. The top 10 U.S. stocks currently account for 33% of the overall market's value, according to Morgan Stanley analysts, and 37.5% of the MSCI USA index.

It's even more extreme in some other ‌tech-heavy markets. The top single stocks in South Korea and Taiwan – Samsung and TSMC – account for around 20% and 40%, respectively, of their benchmark indexes, Morgan Stanley figures show. In fact, these two companies alone account for a fifth of the entire MSCI Emerging Markets Index, which covers 24 countries.

So should investors be worried? It depends.

On the one hand, market concentration can help lift all boats on the way up, as we are seeing today. Average annualized U.S. equity returns in times of increasing concentration since 1950 have been notably higher than during periods of declining concentration, Morgan Stanley's team notes.

But it's the down leg that matters.