After a strong bout of returns, markets have been in a state of flux, with tension between what is happening on the geopolitical front, global markets and fixed income. What started as a good year in the interest rate cycle, with further rate cuts on the horizon, is shaping up to be a year of elevated inflation as a result of the US-Iran war and the rising cost of capital. This has naturally resulted in some pull-backs on fixed-income markets, with some yield slippage as bonds respond to higher inflation and interest rate expectations. This has also resulted in some pull-backs on the JSE, with the all-share index taking back some of its profits. However, some sector rotation from resources to financials, and within resources from gold and platinum to energy, has cushioned the pull-back, resulting only in low single digit negative year-to-date returns and still positive double digit one-year returns. On the global stage, there has been a wider fragmentation of markets, creating some tension between fiscal and monetary policy, and even more tension between fixed income and equity markets. Equity markets have rallied aggressively, despite stretched valuations due to strong earnings momentum and productivity gains, resulting in improved margins. This is despite some excessive sell-offs in the fixed-income markets abroad, with aggressive yield slippage. Despite the appointment of a new US Federal Reserve chair who was believed to be more market friendly than the previous chair, it seems the US will also be headed in the direction of rate hikes. This poses a huge challenge for the US as it looks to refinance close to 50% of its debt over the next 18 months. Amid this turmoil, markets have been dancing in the storm, with the S&P 500 up in the high single digits for the year to date and high double digits on a one-year basis. Furthermore, some positive sentiment in US markets has been due to three upcoming IPOs. The first is SpaceX, which is targeting a $1.8-trillion valuation, followed by Anthropic and OpenAI, which are each targeting about $1-trillion. One has to wonder when the music will stop. Is this the end of a bull market cycle? Although uncertain whether it is a turning point, it certainly is an inflection point — and inflections are difficult to price. SpaceX is likely to achieve its target, even without the revenue to back its target valuation. It is extremely difficult to value as there is no clear precedent, and revenue may prove a shallow measure. There has never been a company similar to SpaceX on listed markets, nor have there been AI companies as large as Anthropic and OpenAI. Although uncertain whether it is a turning point, it certainly is an inflection point — and inflections are difficult to price. On the AI front, the competition is fierce, but these are the market leaders, while on the SpaceX front there is a defendable moat due to the company’s integration into US military defence and Nasa. However, these are all large bets by anyone investing in them, and the returns are skewed asymmetrically to the upside, despite these stretched valuations. The listings could result in some liquidity squeeze as investors sell other assets, most likely in other AI or crypto-related areas, to take up positions. However, given the highly liquid nature of US markets this squeeze is likely to be short-lived. It may push the IPO prices higher over the short term, with some disappointing returns in the weeks to come, but the long-term prospects of these companies are as wide as anyone can imagine. Position sizing and diversification will be key in anyone taking a position. On equity markets in general, we remain moderately bullish in the long term despite the expectation of some short-term volatility. The horse has bolted on the AI and spending fronts. Infrastructure-positive companies are likely to continue benefiting from the AI race, and those that are able to monetise and convert technology improvements to efficiency will reward investors handsomely. And, despite the US fiscus being stretched, it is unlikely to stop spending anytime soon. • Smith is the Chief Investment Officer at Absa Investments