Wells Fargo’s chief equity strategist says the setup for US equities is shifting, with artificial intelligence earnings and two major macro events poised to tilt sentiment to the upside.
In a new CNBC interview, Ohsung Kwon, the bank’s top strategist, believes next week could deliver a rebound in risk appetite as hyperscaler results return to the spotlight.
But in the short term, he notes that market moves may still depend on inflation data.
“I do think the risk is skewed to the upside, though, for the equity market, because I think heading into this week, I think the setup this week was pretty unfavorable for the equity market because we saw no AI earnings and earnings were really dominated by regional banks and industrials, which are obviously seeing more headwinds than AI.
But if you think about the setup for next week, we have all the hyperscalers that are coming out. We have the Fed meeting and the US-China meeting. So I think all of which are probably going to be more positive for the equity market than negative.”
He adds that only a sharp inflation surprise could derail the outlook.
“So unless CPI comes in really hot, I think the risk is skewed to the upside that investors might want to position more bullishly into those events next week.”
Looking at gold, which is up about 60% this year, Kwon says its climb has less to do with safe-haven demand and more with systemic currency devaluation.
“I think what’s really driving gold higher these days is really devaluation, not just the dollar, but really the fiat currency devaluation.”
He says Wells Fargo developed a gauge to track the currency cycle, comparing the money supply to the price of the precious metal.
“We actually came up with a measure to gauge where we are in the currency cycle, which is M2, money supply, divided by the gold price. So essentially, the number of ounces of gold that the entire money supply in the economy can purchase.
We went back all the way to the 1800s and found that we are in the fourth currency devaluation cycle that started in 2022, which coincided with the Russia-Ukraine [conflict] and the hiking cycle. And based on regression, we found three drivers of the currency cycle: the budget balance, so fiscal deficits, debt to GDP and inflation, all of which are probably going to remain negative for the foreseeable future, which means the devaluation cycle likely continues.”
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