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This is the Macro Brief from HSBC Global Investment Research, where we look at the issues driving financial markets across the world.

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Now, US companies have posted another set of remarkably strong earnings numbers this quarter.

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Yet despite this, the market narrative going into earnings was rather downbeat, reflecting concerns over AI spending and geopolitics, among others.

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So today we're looking at what's behind this mismatch and what companies have been saying on their calls with investors.

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We're also looking at the results of our latest Funding the Future survey and what they can tell us about attitudes towards dealmaking and venture capital.

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Thank you.

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So a lot to get through.

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And I'm joined in our London studio by Shiva Jun, data scientist, and Duncan Toms, multi-asset strategist.

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Great to have you both back on the podcast.

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Good to be back.

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Great to be here.

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A lot has happened since we last spoke.

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So let's get into it.

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I'm going to start with the Funding the Future survey.

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I think that's a good one to set the scene.

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So Jun, can we start with you?

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Firstly, remind our listeners, what are you surveying?

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It's a proprietary survey, right?

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Yeah, sure.

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Yeah.

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So it's a proprietary survey that we run and it tracks both private and high growth public investors and see what their sentiment is towards investments about global venture capital, private equity, public markets, and essentially tracks a lot of disruptive technologies right now, AI, and how they're shaping up investment and investment themes in the future.

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So the current iteration of the survey is the ninth.

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It's the ninth indeed.

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Yes.

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So you're starting to get a bit of a history of the trend.

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Yeah, exactly.

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And I think the more history we get, the more interesting insights we can kind of find in the data.

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And the good thing about the survey is we managed to cast a wider net.

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So in this iteration, we've got responses from over 200 investors representing over $2 trillion of asset center management, of which around $900 billion is coming from the VCNP investors.

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So any kind of information from this valuable data set becomes really interesting for us.

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And the results were quite positive, weren't they?

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They're positive, but with a lot of concentration.

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So on a near horizon, private market investors are kind of, I would say they're a little bit moderately positive, but they're kind of not anticipating any big changes.

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Over the 12-month horizon, I think over 60% of the investors that we surveyed are anticipating increase in private market activity.

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On the public side, 55% of the investors that we surveyed are bullish about how the equity market is going to actually perform in the coming next quarter.

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So overall, yes, a lot of opportunity, a lot of positivity, but there is a lot of concentration in AI and AI related deals.

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So we'll come back to that.

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But firstly, I was intrigued because you asked this question about tailwinds, headwinds and tailwinds.

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Headwinds were kind of the classic sort of concerns about, for example, geopolitics.

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But in the tailwinds, 91% responded that one of the tailwinds was the speed of change.

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And intuitively, I would have thought that that would have been a challenge.

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Lots of changes and difficult to keep track.

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So why was the speed of change in tailwind?

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I think it's more a speed of technological changes and how the investors kind of perceive it is as a opportunity creation.

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Right.

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So what they're looking at is AI, which is the dominant disruptive changing theme right now in investors' mind.

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That's creating new markets.

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They're creating new winners, new companies.

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We've seen SpaceX and the likes of Anthropik and OpenAI trying to come into the market.

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It's forcing adoption into companies, which is also producing their own line items in their...

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in their P&L.

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So I think that's what the investors are saying.

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So the more change, the more funding requirements, I guess.

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I think it's more change, more funding, more dealmaking for sure, but also more exit and liquidity opportunities.

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So let's come back to this point on exit, that although the IPO market has certainly sort of picked up, particularly in the US, trade sales seems to be still the favourite exit route.

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Yeah.

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Yeah, I think that's still the strategic preferred avenue from investors.

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But IPO has been improving.

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I think what we did see was in the 2022 market low, exits were very difficult because the valuation for different companies shifted drastically from where the investors were and what the market was actually valuing them.

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like there was no liquidity events.

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Secondaries kind of took their place in the US.

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But what we've seen over the last year in places like Hong Kong, in Asia, in the US, the IPO activity has started to improve again.

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So now 30% of the investors are expecting IPOs as one of their preferred avenues.

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But still, as you say, trade sales and buyouts remain those strategic avenues for exits and liquidity for investors.

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So, and Duncan, do chip in on this one.

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Is AI sucking up all of the investment dollars and are other areas being starved of investment?

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Well...

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Yes, I think AI is definitely the biggest concentration in the market that we have seen.

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I think in the private markets, if you see, about 70% of deal making in the US is coming from AI related activity.

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If you think about global unicorns, if you remove AI from global unicorns, the deal value goes down by about 60%.

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So clearly, that's where the investors are finding opportunity.

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And that's where they want to invest.

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So that is a structural cycle.

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From a public market perspective, AI is also incredibly dominant.

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Yes.

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I mean, SpaceX was just like ginormous, wasn't it, as an IPO?

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Does that leave room for any other IPOs in the market?

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Well, I think the difference when you look at different public markets around the world or different regions and the equity market, we're seeing this increasing concentration towards AI.

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So in the US and EM, you can aggregate it up at around kind of almost 50% of just being exposed to this AI and tech related theme.

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In Europe, that's much lower at around kind of 10%.

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It's been quite stable there.

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But you're seeing this enormous growth, particularly in emerging markets.

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So you've got this great series called Listen Up, and we are using the power of AI for our own work.

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And you're using that to kind of read thousands of earnings transcripts.

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We've just had the reporting season.

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What does the Listen Up series tell us about the earnings season?

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Yeah, absolutely.

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So we are using AI.

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And one of the ways we're using it is to actually analyze what companies are telling us about AI.

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So it's almost a kind of inception related concept there.

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But the way we're using this is to read through the company transcripts and tell us about different themes.

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So one of the ways that we're looking at that is saying, OK, which companies have adopted AI?

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Using tangible evidence that they're providing in their earnings calls over the last kind of three years or so.

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And what we see there is US AI adoption is just shy of 70% and in Europe it's down at 50%.

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So similar to that kind of market breakdown, if you like, a much heavier theme in the US.

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Another way that we use the AI-powered analysis is with guidance sentiment.

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So looking at what companies are telling us about the future.

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And there we're seeing both in the US and in Europe, companies are becoming much more positive about the future, which is really backed up by how strong the recent earnings have been.

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And in your report, you also have a great word map, which is essentially scanning all these earnings transcripts and saying, what are the words that are coming up more frequently?

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And the more frequently the word comes up, the bigger the word.

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And in the middle of the word map was reinforce.

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What's that about?

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Well, look, it's a strong positive word, that.

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And we've seen that used to highlight, I'd say, two themes, one being the strong economy and the other one being the AI-related demand and investment cycle.

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So among reinforce, you see other words that are trending and underline that point.

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So agentic and memory are two of the biggest trending words that we've seen in this earnings season.

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And what's the significance of agentic?

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Whereas this transition to agentic AI, we're not just using or companies aren't just using AI anymore to ask questions about what's going on or have a more advanced Google search, for example, but actually integrating fully agentic AI processes into their businesses and having them operate much more autonomously and deliver much stronger productivity results.

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So for a retail company would be basically putting an agentic AI to answer customer queries?

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That could be one potential application.

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Which is quite basic at the moment, but they're starting to really improve, aren't they?

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Yeah.

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Yeah, I think one thing I'd say is the idea of the AI theme has expanded quite heavily across the companies.

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As Duncan was saying, the agentic term has started to arrive, but that has also meant that the AI theme has shifted from just adoption to a little bit more industrial cycle where what's going to be the economic and physical impact of able to adopt these themes by companies?

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And that's what a lot of companies are talking about.

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So if you'd done a word map when the conflict in Iran had started, geopolitics would probably have featured large, and yet it doesn't now.

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Is the market being complacent?

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Is that... Or is just the AI seems so powerful that it's overwhelming everything?

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I would say a mix of the latter caught up with this really strong earnings backdrop, right?

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And this was actually what happened in Q1 as well, when, yes, we had the conflict in the Middle East happening...

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But once we started getting the strong Q1 earnings coming through, that really became a stronger market theme.

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And that's exactly what we're seeing in Q2 as well.

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I mean, just looking at some of the numbers for the US, you've got about 86% of companies surprising to the upside.

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But if there is one number to remember, it's not that, it's this.

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It's the earnings growth for the S&P 500 in year on year terms is about 50% now.

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50%.

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But how concentrated is that in a small number of companies, leaving the rest in the shadow?

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Yes, it is concentrated in some of the AI related part of the market.

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But like I was saying now, that almost represents half the market in the US as well.

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But what we're seeing as well outside of the US is strength in European earnings as well.

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Some of the strongest earnings that we've seen over the last three years or so.

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So this reinforces the idea that it's not just AI infrastructure led.

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Something broader is happening with earnings momentum here.

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Anything in the survey that struck you that we haven't asked you?

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I think in the survey, the AI theme is obviously clearly very popular.

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The other thing that really stuck us was the sentiment around IPOs has genuinely become much better in different places in different regions.

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So as I said, I think the survey gives a good cross-region analysis of what the investors are thinking.

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And Asia in particular, I think investors are very keen on IPO activity in the near term.

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That's something that we haven't seen before.

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Yes, for a while, in fact.

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So I think that was quite interesting.

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Two new indicators, Duncan, data dashboards, as you refer to them, tracking labor health and inflation heat.

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Inflation is a hot topic, isn't it?

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The market's kind of sometimes worried about it and then kind of stops worrying about it and comes back.

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Depends on the data as well.

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What does the inflation heat data dashboard tell you?

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Well, bringing that all together, I think the labour market dashboard is, or the idea around it, is to take all a broad basis of US data and bring it together into one kind of series that we can look at.

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And that has moderated a little bit.

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We saw pretty strong or an acceleration, more labour market strength in the US earlier this year.

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And that softened somewhat, but hasn't softened to a level where we should be worried about it.

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Which means, as you alluded to, we should really be focusing on inflation here.

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because inflation similarly has gotten much stronger, much hotter over the last six months or so, that acceleration has slowed down.

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And that's the important point.

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The rate of change hasn't necessarily carried on going.

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The last couple of inflation prints not continuing to show stronger and hotter inflation.

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So it's very clear that we've had this US exceptionalism narrative emerge as the labour market's been stronger, as inflation's been hotter.

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Yeah.

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But in some aspects, this is a rear view mirror, right?

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And as we go forward, if we don't see a continued strength in that, in the inflation side of things, the rate hikes that the market are looking for from the Fed might come under question.

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Julian, in the survey, was inflation a feature?

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So in the survey, we do ask investors more topical macro questions around what are their expectations on inflation, what are their expectations about interest rate.

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And I think it's an interesting point to kind of find from investors' perspective, because what they're saying is in the next quarter, they're not anticipating, especially in the US, interest rates to rise.

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So from that perspective, you can kind of make conclusions as to what they are thinking about inflation and labor market and etc.

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So a question for you both, maybe to finish on.

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This morning, I checked the VIX indicator, which is the VIX index, which measures volatility for the U.S. equity market.

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which I was kind of surprised was pretty much at its recent lows.

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Given all the news flow and what we refer to as the Momo unwind, the unwinding of the momentum on some of these AI stocks which have come off and what have you, how come a volatility is so depressed?

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Yeah.

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You could look at that and say, well, is the market too bullish or showing signs of complacency?

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We don't think so.

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We've got a number of different short term sentiment and positioning indicators.

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One of them does look at an element of what the VIX is doing.

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But when we take all of our different indicators and put them together, sentiment is kind of neutral.

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So we're not getting any signal that markets are oversold or markets are overbought, which means that we should look at the fundamentals.

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And the fundamentals with that earnings we've been talking about, very, very strong.

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Yeah.

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June?

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I don't have anything to add to that, but I would say as a sell side analyst, it's going to be perennial.

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Once I mention anything about volatility, it's always going to spike.

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I'm sorry.

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I didn't mean to say anything.

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So I'm not going to say anything about VIX.

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It's true.

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You're right.

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You notice when it's super low.

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Yeah.

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You don't want to kind of just say anything to it.

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So we'll finish on Duncan's comments.

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They're perfect.

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All right.

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Well, I think that's a good point to finish, as you say.

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Thank you very much for your comments.

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And we'll have you back for more AI developments, I'm sure, soon.

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So thank you very much for joining.

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Pleasure.

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Thank you.

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So that's it from us today.

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If you'd like more from HSBC Global Investment Research, then head to LinkedIn and search hashtag HSBC Research.

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We've got loads of content for you.

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Please also check out our Asia-focused sister podcast, Under the Banyan Tree, available wherever you get your podcasts.

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But that's all from us this week here on The Macrobrief.

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This episode was hosted by me, Piers Butler, and produced by Tom Barton.

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We're taking a short summer break, so we'll be back with a new episode at the beginning of September.

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Thanks for listening.