T Rowe. Price's Sebastien Page on the 3 key trends facing the markets

AI Investment Outlook - Strong conviction remains in the AI theme for the next 6 to 12 months, despite a recent 20% pullback in peak momentum stocks over the last four weeks [2][3][5] - Capital expenditure for AI is projected to reach $3 trillion over the next three years, driven by vertical demand for enterprise applications and end-user products like ChatGPT, which has reached 1 billion users [3][4] - Investment strategy focuses on identifying rotating bottlenecks in the supply chain, including cooling equipment, backend equipment, process controls, and chip assembly components [3][5][6] Inflation and Macroeconomic Risks - Market participants may be underpricing inflation risk, as swap contracts forecast 2% or below for the next 12 months, while the current CPI remains at 3.5% [9] - Inflationary pressures are expected to persist due to lagged effects from rising food, housing, energy, and freight costs, which impact the industrial supply chain [7][10][11][12] - AI development acts as a potential source of short-term inflation due to massive energy demands and increased construction costs for data centers [8][14] Portfolio Strategy and Monetary Policy - Portfolios are currently hedged against inflation by holding metals, mining stocks, TIPS (Treasury Inflation-Protected Securities), cash, and direct hedged equity strategies, while reducing exposure to long-term treasury bonds [13][17] - The Federal Reserve is not expected to raise rates aggressively in the short term, as financial conditions have already tightened with long-term rates rising and short-term rates having declined by 175 basis points from their peak [15][16][17] - A short-duration stance is maintained, favoring cash over longer-term bonds to mitigate risks associated with the potential steepening of the yield curve [16][17]