The Australian sharemarket finished the week modestly higher, with the ASX200 up +0.2%, rising in four of the five sessions despite Wednesday’s sell-off. The Materials (+5.9%) and Energy (+1.6%) sectors led the gains, supported by stronger gold, copper, iron ore, uranium, and coal prices, while Health Care (-2.5%), REITs (-2.5%), and Consumer Staples (-1.8%) lagged, pressured by weaker earnings and US trade tariff news on pharmaceuticals. Precious metals miners and lithium/critical minerals names outperformed, while the Big 4 banks recovered modestly after midweek weakness. The RBA maintained a cautious stance, noting inflation within target and a softening but still tight labour market, while markets continued to price in a likely 0.25% rate cut in November.
US sharemarkets retreated last week, with the S&P 500 and NASDAQ posting their steepest weekly declines since early August after recently hitting fresh record highs. Losses were led by the Communication Services (-2.7%) and Consumer Discretionary (-1.2%) sectors, while Energy (+4.7%) and Utilities (2.8%) outperformed as the price of oil surged more than 5%. Investors slightly reduced expectations for two more rate cuts this year, as new-home sales hit their fastest pace since January 2022, while GDP was revised higher, and jobless claims fell. Commentary from the Federal Reserve was mixed, with some policymakers pushing for faster cuts and others urging patience, while new Trump tariffs and rising Russia-NATO tensions added to uncertainty.
European sharemarkets edged slightly higher, as the STOXX Europe 600 rose 0.1%. Sector performances were mixed, with the Basic Resources (+5.0%) sector boosted by higher commodity prices, while the Health Care (-3.2%) and Automakers (-0.9%) sectors lagged due to tariffs and weak guidance. Political and trade risks weighed, with President Trump announcing sweeping new tariffs on European pharmaceuticals, furniture, and trucks, posing challenges for exporters heavily reliant on US markets. Eurozone PMI hit a 16-month high, supported by Germany’s services sector, while France continued to struggle with its thirteenth straight contraction. Similar to the US, the Energy and Utilities sectors enjoyed strong performances, off the back of an increased oil price.
With investor interest in Artificial Intelligence (AI) continuing to grow and sharemarkets running at all-time highs, comparisons to the dotcom bubble of the late 1990s have become increasingly common. That earlier episode was defined by the emergence of the internet, driving a surge in technology-related investment, speculative valuations and a sharp correction.
Naturally, it leads to the question, is history repeating with this new AI cycle? Our view is that while there are obvious similarities, the current AI-driven investment environment is different.
Built on solid foundation, grounded in reality
One of the most notable differences lies in the financial health of the companies leading today’s AI developments. In the late 1990s, many high-flying technology firms had unproven business models and little to no revenue. This time, the core group investing heavily in AI, companies like Microsoft, Google, Meta and Amazon, are already profitable and are largely funding their AI-related capital expenditure from cash, not with debt or through speculative equity raisings and Initial Public Offerings (IPOs).
Better starting point, accelerated hardware improvements
Another important distinction is the pace of technological improvement. In the dotcom period, infrastructure buildout, especially broadband, lagged well behind business ambition. Today, a lot of the heavy lifting in regard to computing infrastructure has been done (or is at least better known). AI specific hardware is advancing much faster, with each generation of chip delivering superior performance and efficiency. That encourages continuous investment, even without growing total computing demand, simply because newer systems are more cost-effective. That’s important when we consider the amount of energy needed to power AI.
Demand is broad-based and visible
The enthusiasm around AI is also being driven by practical use cases already in place. Governments, corporates and even individuals are integrating AI tools into their workflows, often with measurable creative, productive and competitive gains. There are early signals of a broad and commercially meaningful shift in the way everyone does things. This is unique when compared to the dotcom period, where the benefits of the new internet technology proved elusive and/or were drawn out in the decades that followed.
Valuations elevated, but not excessive or unjustified
Of course, it would be wrong to say that valuations aren't stretched in parts of the market. Many technology names trade at a premium to their historical averages. However, we think elevated prices are more justifiable now when compared to the dotcom period. There are actual revenues and earnings to back up the AI ‘hype’.
The below charts prove our point that fundamentals in this AI cycle are better grounded, with valuations being supported by real earnings growth. It compares the returns of NVIDIA (AI leader) and Cisco (internet leader) by looking at actual earnings growth versus just a change in the stock’s valuation multiple (Price/Earnings Ratio).
Investment Implications
We think AI is a critical theme to have exposure to, with careful consideration. While parts of the market may be pricing in overly optimistic scenarios, the core investment story is supported by real structural demand. Rather than trying to pick short-term winners, or time the market perfectly, we lean into quality businesses we see as near-term tangible beneficiaries of AI. This environment is not without risk, after all, no secular trend moves in a straight line. However, this time it is not built on the same fragile base that defined earlier technology cycles.
Locally, the RBA will announce its latest interest rate decision, however no change to the cash rate is expected.
Overseas, investors will gain an insight into Consumer Confidence in Europe, and the Gross Domestic Product for the second quarter in the UK is scheduled to be released.