Equity Markets Lower as 2024 Draws to Close: Navigating Geopolitical Risks and AI Sentiment

As the year 2024 winds down, equity markets have been grappling with a mix of geopolitical tensions, trade protectionism, and shifting AI sentiment. The first half of the year was characterized by strong headline returns, low volatility, and persistent mega cap tech leadership. However, recent macroeconomic and geopolitical developments have raised concerns about the sustainability of these trends.



Geopolitical tensions have been steadily rising, with global geopolitical risks reaching highs not seen in more than a decade (Figure 1). This increase in geopolitical risks has disproportionately impacted globally exposed firms, particularly those in sectors with significant international operations or supply chains. For instance, the US-China trade dispute has led to increased tariffs and other barriers, making it more challenging for companies to operate and profit in these markets. This has resulted in companies announcing reshoring activities, bringing production, supply chains, and other business operations back to domestic locations (Figure 2). This trend has been particularly evident in industries such as manufacturing and logistics, where companies are seeking to reduce their exposure to geopolitical risks and increase domestic self-sufficiency.

Investors have adapted their portfolios to manage geopolitical risks by focusing on companies that are building domestic self-sufficiency and managing geopolitical risks. One strategy that has been effective is reshoring, or bringing production, supply chains, and other business operations back to domestic locations. This trend has been steadily rising, with around 350,000 company announcements related to reshoring jobs in 2023 (Figure 2). Additionally, investors have been using large language models (LLMs) supplemented with granular text analysis and alternative data to build a comprehensive basket of exposures. This analysis reflects a positive view towards domestic industrials, raw materials suppliers, and real estate companies, and a relatively more negative view towards internationally exposed manufacturers and logistics firms.



AI sentiment has been slipping, but it's still not at DotCom 2.0 levels. This shift in sentiment has led to a pullback in tech stocks, with the "Magnificent 7" (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) experiencing five consecutive weeks of negative returns before rebounding. As of August 29, 2024, they had returned 34% year-to-date (Source: Bloomberg). The tech sector is at the intersection of AI and geopolitical fragmentation, with US tech companies generating nearly 60% of revenues overseas (Source: Bloomberg). This puts them at risk of geopolitical headwinds, such as the doubling of semiconductor tariffs to 50% by the US. However, supportive legislation like the CHIPS and Science Act of 2022, which invests nearly $53 billion in US semiconductor manufacturing, research, and development, can create a supportive backdrop for companies fostering US-centric technological innovation and production (Source: Morningstar).



As we approach the end of 2024, investors should remain vigilant to the potential risks posed by geopolitical tensions and shifting AI sentiment. While the broad stock market has shown resilience, individual sectors and stocks may be more vulnerable to these factors. By focusing on companies that are building domestic self-sufficiency and managing geopolitical risks, investors can position their portfolios to better navigate the challenges and opportunities that lie ahead.