Equity markets enjoyed a remarkable run through April and May, powered higher by strong earnings reports for the first quarter and investor confidence in technology companies’ Artificial Intelligence (AI) capital expenditure plans. However, the rally hit a wall late last week after semiconductor and infrastructure software company, Broadcom, released its earnings report for its second fiscal quarter.
Broadcom continued the recent trend among big tech firms of posting healthy revenues and beating earnings guidance, but that was not enough to meet investors’ lofty expectations. In particular, Broadcom’s forward guidance disappointed markets looking for exponential growth. The company had decided to keep its fiscal 2027 AI revenue target at $100 billion rather than raising it, as many had anticipated.
Broadcom shed nearly 20% of its value across two sessions, contributing to a wider sell-off of AI-related stocks. The tech-heavy Nasdaq composite experienced its biggest drop of the year last Friday, when it plunged by 4%. The contagion spread to Asian chipmakers, with trade on South Korea’s Kospi briefly stopped on Monday after the market slumped nearly 9% in a single session.
The AI growth fears were compounded by macroeconomic news. A blowout US jobs report, with 172,000 jobs added in May against a consensus forecast of 85,000, and a consumer price inflation print of 4.2% for the same month, fuelled fears of inflation. Market participants took this data to mean that the Federal Reserve will not have scope to reduce interest rates.
The European, Australian and Canadian central banks raised interest rates this week, largely because of energy shocks related to the Iran war, and the Fed may be forced to do the same in months to come. Traders are now pricing in a more than 60% probability of at least one rate hike by year-end. Higher interest rates would raise costs of capital for AI firms during the race to build infrastructure, while also reducing the appeal of richly valued growth stocks and increasing competition from fixed-income assets.
Thanks to these two factors – Broadcom and renewed inflation concerns – most US Big Technology names and Asian AI infrastructure companies are down for the month to date. However, this pullback has not yet been enough to erase the strong gains we saw in April and May. The Nasdaq Composite is still up roughly 11% year-to-date, and the S&P 500 IT EFT is up around 17.2%, with markets rallying late this week amid hopes of an end to the war in Iran.
In that context, this week’s tech turbulence should not be seen as a loss of faith in AI, but rather as the sector taking a breather. As AI adoption accelerates and the winners and losers become clear, we can expect to see investors demanding proof of earnings delivery and capex returns before extending valuations. We see this as a form of market discipline that could set the stage for continued growth later in the year.
Investors will be scrutinising earnings for the second quarter, starting in late July, which will be the next major test of whether the valuations of Big Technology companies can be justified. Fed guidance at the next policy meeting will also feed into market confidence. Finally, with the war in Iran still unresolved, the progress of ceasefire negotiations will play an important role in shaping performance in the weeks ahead.
“The easy phase of the AI rally is likely over. The market has moved from rerating to proof, which means AI-linked companies now need to show clearer monetisation, earnings delivery, capital expenditure discipline and returns on infrastructure spend.”
– Charu Chanana, Chief Investment Strategist at Saxo
“It’s often two steps forward, one step back, and recently we’ve had three steps forward. A step back in some of the hotter areas of the market, such as tech, that allows expectations and prices to reset, is to be expected and healthy for the long-term sustainability of the bull market.”
– Keith Lerner at Truist Advisory Services
Global News
- Trump finds himself in a triple bind as Iran continues to disrupt global energy supplies, Israel expands military operations in Lebanon and pressure mounts from Republican hawks for a more aggressive response. With the war becoming increasingly costly for the US and the wider region, concerns are growing over its impact on energy markets, inflation and political support at home. The Economist argued on Tuesday that a deal to reopen the Strait of Hormuz may be Trump’s most realistic path to reducing regional instability, even if it falls short of his stated objective of dismantling Iran’s nuclear programme.
- Trump said on Thursday that the US would halt planned military strikes against Iran, reversing course after two days of airstrikes and signalling that a diplomatic agreement may be close. The proposed framework would extend the ceasefire, reopen the Strait of Hormuz, provide sanctions relief to Iran and restart nuclear negotiations, although Tehran said no final agreement had been approved. Markets welcomed the development, with Brent crude falling to around $89 a barrel, the Bloomberg Dollar Spot Index declining 0.3%, and the S&P 500 rising 1.8% as investors reduced safe-haven positions and increased exposure to risk assets on expectations of lower geopolitical tensions and improved energy security.
- Treasury Secretary Scott Bessent said on Thursday that the US would use frozen Iranian assets to help cover the cost of any damage caused by Iranian attacks on US allies in the Gulf, including costs linked to disruptions in regional shipping. The comments add another layer of financial pressure on Tehran, which has been seeking the return of roughly $24 billion in frozen assets as part of peace negotiations. Iran rejected the proposal, arguing that the funds cannot be used to compensate regional allies or finance reconstruction efforts.
- US producer prices rose 6.5% year-on-year in May, the fastest pace in more than three years, while core producer inflation reached 4.9%, according to Bureau of Labor Statistics data released on Thursday. Higher energy costs linked to the Middle East conflict are increasingly feeding through to transportation, warehousing and food prices, broadening inflation pressures across the economy and reinforcing expectations that the Fed may keep interest rates higher for longer.
- Solar overtook coal in US power generation for the first time in May, supplying 12.8% of electricity compared with coal’s 12.2%, according to Ember data released on Wednesday. Solar generation rose 17% year-on-year while coal output fell 11%, reflecting a broader shift in the US power mix as utilities and data-centre developers seek new sources of electricity to meet growing AI-related demand. Natural gas remained the largest source of generation at 37%, while solar and battery storage accounted for 91% of new US power capacity installed in the first quarter.
- Governments worldwide have raised a record $504 billion through syndicated bond sales so far this year, exceeding issuance levels seen in the first half of 2020, according to Bloomberg data released on Wednesday. The surge reflects increased spending on defence, infrastructure and energy transition projects, as well as refinancing of maturing pandemic-era debt. Despite elevated borrowing costs and uncertainty over the interest-rate outlook, strong investor demand continues to support government borrowing even as bond yields remain near their highest levels in more than a decade.
- The World Bank cut its global growth forecast for 2026 to 2.5% on Thursday, warning that the war in the Middle East is disrupting commodity flows, pushing up energy prices and weighing on economic activity. The revised forecast would mark the weakest global growth rate since 2020. The lender expects Brent crude to average $94 a barrel this year, around 50% higher than its January forecast, while global inflation is projected to rise to 4%. The World Bank said two-thirds of economies have seen their growth prospects deteriorate.
- China’s exports rose more than 19% and imports surged over 27% in May, both exceeding forecasts, as global demand for AI-related hardware continued to drive trade growth, customs data released on Tuesday showed. Semiconductor exports jumped 111% year-on-year to $36 billion, while exports of computers and related components rose 66%, underscoring the growing role of AI infrastructure spending in supporting China’s manufacturing sector. The stronger-than-expected trade data produced a $105.4 billion trade surplus, suggesting AI demand is helping offset domestic economic weakness and broader global uncertainty.
- SpaceX completed the largest initial public offering in history on Thursday, raising $75 billion at a valuation of about $1.8 trillion as demand exceeded the shares available by more than four times. The listing eclipsed Saudi Aramco’s previous record and makes SpaceX one of the world’s 10 largest listed companies by market value. The strong investor appetite reflects growing enthusiasm for AI, data-centre infrastructure and space technology, while the transaction also moves founder Elon Musk closer to becoming the world’s first trillionaire.
- Nvidia announced a series of partnerships in South Korea, including a multi-year technology agreement with SK Hynix, as it seeks to secure supplies of advanced memory chips for its expanding AI infrastructure ambitions. The companies will collaborate on next-generation memory technologies for AI data centres, supercomputers and robotics, while using AI to accelerate semiconductor design and manufacturing. Announced during CEO Jensen Huang’s visit to South Korea, the agreements underscore the growing investment required across the AI supply chain as demand for computing capacity continues to surge.
- Apple unveiled a rebuilt AI-powered Siri and a broader suite of AI features at its Worldwide Developers Conference on Monday, marking a renewed effort to compete with rivals such as OpenAI, Google and Anthropic. The upgraded assistant is designed to better understand context and interact more effectively with apps, while supporting future AI-powered products and services. The announcement represents Apple’s latest attempt to strengthen its position in the AI era after delays to several previously promised features.
- Eli Lilly remains the dominant player in the fast-growing obesity drug market, maintaining its lead over Novo Nordisk as a growing number of pharmaceutical companies race to enter the sector. Trial data presented by Lilly last weekend showed that its experimental obesity drug, retatrutide, could deliver greater weight loss than existing treatments, potentially extending the company’s market advantage. The growing number of competitors highlights the enormous commercial opportunity created by the global obesity drug industry.
- As at Thursday’s close the S&P 500 was up 0.14% for the week after falling 2.6% last Friday.
Local News
- Fitch Ratings upgraded South Africa’s sovereign credit rating to BB from BB- last Friday, marking the country’s first upgrade in more than 20 years and bringing it into line with recent upgrades by Moody’s and S&P Global Ratings. Fitch cited prudent fiscal management, progress in reducing budget deficits and lower-than-expected debt levels, while maintaining a stable outlook. The upgrade signals growing confidence in South Africa’s fiscal trajectory, although the country remains two notches below investment grade.
- The World Bank cut South Africa’s 2026 growth forecast to 1.0% from 1.4% on Thursday, citing the impact of the Middle East conflict, which is driving up energy prices, weakening global demand and weighing on manufacturing, mining and agriculture. The bank said on Thursday that growth remains constrained by structural challenges, including weak investment, logistics bottlenecks and electricity constraints, while warning that the outlook remains highly uncertain should the war persist.
- South African Reserve Bank (SARB) Governor Lesetja Kganyago warned on Wednesday that the Middle East conflict, higher oil prices and rising global uncertainty have increased risks to the country’s financial system, with tighter financial conditions and weaker growth prospects weighing on the outlook. Despite the deterioration since November, Kganyago said South Africa’s financial sector remains resilient, supported by well-capitalised institutions, improved fiscal dynamics and strong foreign-exchange reserves, while cautioning that AI-driven cyber threats are becoming an increasingly important financial stability risk.
- Treasury warned on Tuesday that South Africa could face increased scrutiny in its next Financial Action Task Force (FATF) assessment if weaknesses in investigating organised crime, prosecuting financial crimes and recovering criminal assets persist. While South Africa exited the FATF grey list in October 2025, National Treasury said the upcoming review will place greater emphasis on demonstrating effective enforcement rather than legislative compliance.
- South Africa’s GDP grew 0.5% in the first quarter, ahead of the 0.3% consensus forecast and marking a sixth consecutive quarter of expansion, Statistics South Africa data released on Tuesday showed. Finance, agriculture and trade led growth, while manufacturing contracted for a second consecutive quarter. However, the underlying picture remained weak, with household spending growing at its slowest pace in two years and fixed investment declining. As the data largely pre-dates the Middle East conflict, the full impact of higher fuel and input costs has yet to be reflected in the economy.
- South Africa’s current account surplus widened to 2.4% of GDP, or R190.7 billion, in the first quarter, the largest surplus in four years and well above the 1.1% consensus forecast, according to SARB data released on Thursday. The second consecutive quarterly surplus was driven by higher gold export earnings and lower imports, which lifted the trade surplus to R437.9 billion. The stronger-than-expected result supported the rand and highlights the extent to which elevated commodity prices have helped offset broader economic headwinds.
- The National Energy Regulator of South Africa said on Tuesday it is considering capping gas price increases at 20% to 25% a year during the transition from natural gas to methane-rich gas (MRG) between July 2028 and June 2030 to protect industrial users that contribute an estimated R300 billion to R500 billion annually to the economy. The regulator cited risks arising from Sasol’s position as the sole producer, supplier and regulated trader of MRG as gas supplies from Mozambique decline. Sasol said it is assessing the proposals and supports measures that balance affordability with sustainable supply.
- The Competition Tribunal conditionally approved a deal by Billionaire Johann Rupert-owned Remgro to buy Mediclinic International’s Southern African operations on Wednesday, giving his investment vehicle full ownership of the Intercare hospital group and ER24 emergency medical services on Wednesday. The deal forms part of a restructuring with Mediterranean Shipping Company’s investment arm, allowing Remgro to focus on Southern African healthcare assets while its partner assumes ownership of other Mediclinic operations.
- Spar’s turnaround under new CEO Reeza Isaacs suffered a setback as first-half profits slumped, with operating profit from continuing operations falling 45% and headline earnings per share down 53.9%. No dividend was declared on Wednesday as the board focused on operational recovery. Isaacs said execution failures, weak profitability and supply-chain issues are being tackled through a back-to-basics turnaround strategy focused on retail operations, margins, accountability and restoring competitiveness in South Africa.
- As at the time of writing, the rand was 1.5% stronger against the dollar (after weakening 1.5% last Friday), and the ALSI was 1.2% up for the week (after declining by 1.1% last Friday).
Sources: Dynasty, Business Day, Business Report, Moneyweb, Daily Maverick, Bloomberg, Reuters, AP, The Economist, etc.
