Economists reveal for the first time: 6 questions that will determine where your money is going

Despite geopolitical tensions, economic data in the first half of the year surprised to the upside and inflation remained under control. The US economy remains strong, with improved productivity, stable labor costs, and low unemployment — data indicating growth without significant inflationary pressures. Against this backdrop, the Federal Reserve is expected to leave interest rates unchanged.

However, risks still exist. The US economy unexpectedly lost 23,000 jobs in July, and the data for May and June were also weaker than expected. Declines in chip stocks and technology giants have brought back concerns surrounding AI investments, and US long-term government bond yields have remained high. The US and Japan even intervened in the foreign exchange market to support the Japanese yen, for the first time since 1998.

Economists estimate that at this stage there is no significant cause for concern in these developments, and point to six key issues that require monitoring:

1. Could concerns surrounding the winners and losers in the AI field harm the stock markets?

"We estimate that the rotation in the technology sector will not lead to a broad wave of declines. Large US technology companies recorded a growth of almost 70% in profits in the second quarter, and the demand for AI infrastructure continues to grow. We see potential in companies throughout the entire AI chain and prefer software and technology companies in emerging markets due to the lower valuation."

1. Can the rise in the stock market, which has expanded beyond technology stocks to other sectors and regions, continue?

"We estimate that it can. Activity in American industry has strengthened and corporate profits in the second quarter surprised to the upside in most sectors. We prefer the finance, raw materials, infrastructure, and healthcare sectors, and see potential for continued gains also in view of the more attractive valuation in developed markets."

1. What is the significance of the coordinated intervention by the US and Japan to support the Japanese yen?

"This is a rare move, intended on Japan's part to stabilize the yen and on the US's part to reduce, among other things, the risk of selling US bonds by Japanese investors. However, we do not expect the intervention to provide prolonged support for the Japanese currency."

1. Does the Federal Reserve have a credibility problem?

"We estimate that it does not. Despite the lack of clarity surrounding Fed policy, long-term inflation expectations have remained stable and there is a moderation in the prices of many goods and services. As long as there is no significant deterioration in the labor market and the risk of recession does not increase, real yields are expected to remain high."

1. Who wants to hold US government bonds?

"The share of foreign investors in US bonds has dropped from about 50% in 2012 to about 30% today. However, a yield of more than 5% on long-term bonds is expected to support demand from American investors. We maintain a cautious approach toward long-term bonds and prefer government bonds for a 5-7 year term."

1. Are the bond market and the stock market telling the same story?

"Growth without inflationary pressures continues to support stocks and part of the bond market. We continue to hold an overweight position in stocks, both in developed markets and in emerging markets, and continue to prefer emerging market bonds."

This review was prepared by Michael Strobaek, Global Chief Investment Officer; Dr. Nanette Hechler-Fayd'herbe, Head of Investment Strategy, Sustainability and Research and CIO EMEA at the Swiss bank Lombard Odier.