Musk’s biggest bet meets the markets

In the latest monthly update, our Chief Investment Officer, Richard Flax, explores how markets are navigating a dual scenario, between geopolitical tensions and optimism on corporate earnings and Artificial Intelligence.  You can also find a written version of his commentary below.

Over the past few weeks we’ve continued to see a tug of war between optimism on corporate earnings and Artificial intelligence on the one hand, and geopolitical uncertainty on the other, with the Strait of Hormuz still largely closed and the oil price still sitting around 100 USD per barrel. 

So far in May, optimism has won out, with equities continuing to rally. Tech has led the move higher, as the Nasdaq has outperformed global equities. The tech supply chain has driven equity markets outside the US, particularly in Emerging Markets. It’s interesting, though, that we’ve seen some volatility in Korea over the past couple of weeks. There were threats of strikes among tech workers looking for better pay, while the government also floated the idea of a windfall tax on some of the big tech companies that have been benefiting from the recent boom. Investors have largely taken that news in stride – the strikes were called off – but it’s a reminder of the potential tension between shareholders, employees and governments.

Fixed income markets have been more muted, given concerns about inflation. Inflation figures have moved higher, although the latest released in the UK was a little better than feared. That probably made it easier for the Bank of England to keep rates unchanged at its latest policy meeting. Central bankers around the world have a difficult path to follow. Rising energy prices will feed through into higher prices – should central bankers raise rates? The traditional playbook says no – higher rates won’t solve a shock to energy supply. But central bankers will be wary of seeing inflation accelerate too quickly. As always, a lot will depend on how soon the supply of oil improves. At this point, we’re not expecting lower policy rates in 2026 in the UK, although we think we might be able to avoid rate hikes this year. 

Turning to geopolitics – It’s tough to draw too many conclusions about the state of the Middle East conflict. There have been a number of announcements but not much real change. If we look at current prices for things like oil, we think that investors are forecasting a deal to reopen the Strait of Hormuz on terms that won’t have too much of an impact on the global economy. Even in that scenario, it will likely take time for the supply of oil to normalise. So, we think that households are likely to face higher energy prices for some months to come, but that equity investors might take that scenario in stride.

Key number and key question

28.5 trillion dollars: that’s the total addressable market that SpaceX, the rocket and satellite business founded by Elon Musk, believes it’s focused on. SpaceX has recently filed to list as a public company, and so investors are trying to value the business. It’s always going to be tricky to value a business whose goal is interstellar travel. A lot might depend on whether you think that 28.5 trillion figure is credible over an investable time horizon. At Moneyfarm, we don’t invest in IPOs directly, but we’re expecting to see some large IPOs over the next six months and those should tell us a lot about investor sentiment. For now, strong earnings growth across equity markets has left investors fairly upbeat.