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The framework agreement between the U.S. and Iran lasted only about 20 days before both sides resumed their military attacks. Market observers largely agreed that the agreement was built on fragile ground: Key points of contention remained unresolved, and a renewed flare-up of hostilities was therefore considered likely. However, the agreement’s exceptionally short lifespan still came as a surprise to many market participants—consequently, oil prices rose noticeably, and with them, concerns about another surge in inflation.
High interest rates remain another headwind for the stock markets, particularly for valuations: Yields on 10-year government bonds remain near their multi-year highs in most developed countries, and real interest rates, in particular, have risen. One possible explanation is the enormous capital requirements of the AI boom, which is intensifying competition for available capital and thereby triggering a crowding-out effect. This drives up financing costs for other borrowers—both corporations and governments—which in turn increases upward pressure on interest rates. Since this trend is expected to continue, a noticeable easing of interest rates—and thus any significant expansion in valuations—is unlikely in the short term.
Despite the headwinds outlined above, there have been no major price corrections so far—and for good reason: The current earnings season has gotten off to a strong start and confirms companies’ robust earnings momentum. High earnings expectations are likely to be met at the very least, but are more likely to be exceeded once again. As long as this fundamental strength persists, major setbacks in the stock markets remain unlikely.
The current turmoil in the global semiconductor sector is causing uncertainty among professional investors: The ongoing AI boom has triggered significant capacity bottlenecks. These are no longer limited to high-performance chips but are increasingly affecting other areas of the semiconductor industry. Consequently, revenues, profits, and profit margins at many companies have risen sharply in recent quarters, driving stock prices significantly higher. Despite this fundamental support, investors have recently become increasingly cautious and have been selling off semiconductor stocks. This is driven less by current earnings performance than by uncertainty about the sustainability of the boom.
Two opposing viewpoints are currently clashing among investors. Skeptics point out that the semiconductor industry as a whole is highly cyclical and prone to the classic “pig cycle.” High profit margins lead to massive capacity expansion by established manufacturers and, at the same time, make it more attractive for new players to enter the market. After a time lag, this results in an oversupply. This puts pressure on prices, profit margins, and ultimately corporate earnings.
Optimists, including many companies within the industry itself, argue, however, that the AI boom has triggered a structural surge in demand and that the industry is only at the beginning of a long-term investment cycle. Even with a significant expansion of capacity by chip manufacturers, demand is likely to exceed supply for years to come. In this scenario, profit margins would remain high not only for high-performance chips but also across much of the rest of the semiconductor industry.
It is unlikely that a definitive conclusion will be reached this year regarding which perspective ultimately prevails. In our view, capacity constraints will persist at least until mid-2027. Nevertheless, professional investors should not view attractive valuations in isolation. Even though earnings growth is currently exceptionally robust, the sector remains subject to heightened risks due to uncertainty surrounding long-term supply and demand dynamics.
