AI, Iran and the Case for Contrarian Investing
· Pietari Laurila
Two macro themes have dominated markets this year: AI and the Iran war.
The AI boom is increasingly dividing the market into winners and losers.
AI infrastructure companies are expected to account for more than half of S&P 500 earnings growth in Q3, and their share prices have surged this year.
At the same time, the AI boom has created headwinds elsewhere. Investments in data centres, chips and power infrastructure are increasing demand for capital and keeping interest rates higher for longer.
That matters for more interest-rate-sensitive parts of the market, for example real estate, where higher bond yields put pressure on both valuations and financing costs.
The Iran war has created a second divide: that between energy exporters and importers.
Europe is an example of the latter. It may therefore be no surprise that the euro recently fell to a 17-month low, as high energy prices, rising bond yields and European political concerns supported the dollar.
So where does that leave investors?
I don't think the answer is simply to chase what has already worked.
US equities now carry very high expectations. Vanguard, for example, expects roughly 4–6% annual returns from US equities over the next decade, while some valuation-based models produce even lower estimates.
Europe, by contrast, remains considerably cheaper. The MSCI Europe index recently traded at around 15 times expected earnings, close to its historical average and at a substantial discount to the US.
There are also some tentative signs that recent macro trends may be beginning to turn.
Interest rates may be reaching a point where simply stopping their rise would matter. If energy markets gradually normalise, bond yields could stabilise or move lower.
Political risk could also become less one-sided. Marine Le Pen today presented a more fiscally conservative programme than markets previously expected, including plans for substantial spending cuts and a declining French budget deficit. French bond yields fell following the announcement.
The key point for contrarian investors is simple:
Starting valuations matter. What has performed best recently is not necessarily what will produce the best returns from here.