PCE Inflation In Line With Expectations

Investors on Sept. 26 were cheered by the August Personal Consumption Expenditures Price Index, which showed that inflation in August was in line with expectations, although still above target. Following the news, the Morningstar US Market Index rose on the day, but fell 0.4% over the week.

Less discussed was a surprise upward revision of second quarter GDP to an annual growth rate of 3.8%, driven primarily by higher estimates of consumer spending. Evidence of a more resilient economy coupled with above target inflation would normally challenge expectations of future interest rates cuts, but both the futures market and Morningstar senior US economist, Preston Caldwell, continue to expect further cuts before the year-end.

Tariffs Make Headlines Again

Tariffs returned to the headlines last week as President Donald Trump announced a 100% tariff on branded medicines. Although both the Morningstar Developed Markets Europe Healthcare and Morningstar Asia-Pacific Healthcare Indexes fell sharply over the week, down 3.8% and 3.3% respectively, Jay Lee, Morningstar senior healthcare analyst, expects the impact to be small due to other trade agreements, current inventory and ongoing investment in US manufacturing by overseas pharmaceutical companies. US healthcare stocks also fell over the week, increasing the sector’s discount to fair value.

Will Nvidia’s OpenAi Deal Break Records?

Technology stocks ended flat at the end of a volatile week that started with the announcement of an eye-catching deal between Nvidia NVDA and OpenAI. Nvidia has agreed to invest up to $100 billion in the ChatGPT creator in a partnership deal in which Nvidia will supply chips to OpenAI to run and train its models. If Nvidia were to commit the full $100 billion, it would represent the largest-ever investment in a venture capital-backed company, a record that OpenAI already holds following a $40 billion investment in March.

Coming just a few days after Nvidia’s $5 billion investment in Intel, which itself was hot on the heels of strong OpenAI-driven results from Oracle, this deal highlights both the enormous amount of capital being invested in this area and the somewhat circular nature of this investment.

While AI is clearly transformational, investing history is littered with examples of previous booms in technology that failed to deliver lasting returns for later investors, as the capital deployed far exceeded the ability of the economy to use the technology. This history stretches from the British railway boom of the 1840s through to the telecoms bubble at the turn of the 21st century.

While it is very difficult to spot a bubble in advance, and even more challenging to predict the onset of its demise, the sums being invested compared with the revenue of the businesses involved should cause investors to pause for thought.

According to CNBC, OpenAI’s CFO Sarah Friar estimates the company’s revenue to be $13 billion in 2025. Although substantial, this sum is dwarfed by OpenAI’s spending commitments. Investing ahead of revenue is usual for a venture capital-backed business and the commercial potential of AI to transform society may justify the scale of the capital being deployed. But there are clearly a wide range of other possible outcomes which investors should consider.

The AI Impact on Data Center Demand

Another key question that arises from the scale of AI investment is the electrical power required to fuel it. Data centers have been a key driver of the returns of utility companies, especially independent power producers, over the last year. However, companies will not all benefit equally from this investment boom. To help investors understand this market in more detail, Morningstar’s utilities research team has published a report on the impact of data center demand.

How to Weather a Government Shutdown

In the absence of a government shutdown, the focus is likely to be on the health of the economy, with several indicators of consumer and business sentiment leading up to the US employment report on Oct. 3. A shutdown would delay this report and upend the news flow. We have learned from previous shutdowns that the majority of the economic damage is temporary, and investors and the Fed are likely to discount the immediate impact.

However, the impact of a shutdown in a febrile political atmosphere is likely to produce disconcerting headlines that could act as stumbling blocks for unprepared investors. It is therefore worth reviewing this article from Samantha Lamas, a senior behavioral insights researcher for Morningstar, on how to deal with economic uncertainty.