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Inflation, AI Spending Concerns to Keep Markets Volatile in Near Term, Wells Fargo Says

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Inflation, AI Spending Concerns to Keep Markets Volatile in Near Term, Wells Fargo Says

Concerns around inflation and artificial intelligence spending will likely continue to fuel market volatility in the near term after US equity benchmarks declined in early June, Wells Fargo Investment Institute said in a note on Wednesday.

The Nasdaq fell 4.8% between June 1 and June 9, while the S&P 500 declined 2.7%, Wells Fargo said. The Dow Jones Industrials edged down 0.2% over the period.

"Worries about rising interest rates and inflation, along with (AI) spending have triggered volatility between June 1-9," Wells Fargo Global Equity Strategist Doug Beath said.

US annual inflation accelerated to the highest in about three years, official data showed Wednesday, fueling expectations that the Federal Reserve will keep interest rates on hold for some time.

A strong labor market and rising prices have weakened the case for near-term monetary policy easing.

Markets may remain volatile in the short term because investors are concerned whether capital expenditure levels can be sustained as technology shares surged following downward revisions to first-quarter productivity, according to the Wells Fargo report.

In addition, "financial and commodity markets have been slow to appreciate the economic damage that is building as countries use up their energy reserves," Beath said.

The global crude market has already lost 1 billion barrels of supply since the Iran war began at the end of February, Rystad Energy said in a note emailed Tuesday.

Wall Street is also tracking upcoming mega-cap initial pubic offerings, with OpenAI, Anthropic and Elon Musk-led SpaceX heading to public markets in what could be the largest capital-raising cycle.

"While strong investor sentiment is likely to support upcoming mega IPOs, their scale and current unprofitability introduce risks of short-term volatility," Beath said.

Wells Fargo continues to expect the S&P 500 to close out the year between 7,400 and 7,600.

Last week, the benchmark equity index declined after nine straight weekly gains.

"We continue to see pullbacks as buying opportunities," Beath wrote.

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