A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

World stocks rose to fresh peaks again on Tuesday as no major change in US-Iran tensions, together with a general calm across currency and bond markets, encouraged investors to keep buying. In the US, small caps and non-tech sectors outperformed.

In my column today, I look at the almost stealth-like rally of small caps this year. While all the headlines have centered on the hyperscalers and Big Tech behemoths, the big winners from the AI frenzy have actually been small cap tech stocks. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Alphabet scoop

Google's parent company Alphabet stunned investors late Monday, announcing it will raise $80 billion in equity financing, with $10 billion coming from Berkshire Hathaway. In many ways it makes sense - debt is getting pricier, there's a huge AI capex bill to fund, and $80 billion is a fraction of $4.5 trillion market cap. So why not? 

The concern is not so much the amounts involved, but the direction of travel. At the end of March, Google had $126 billion cash on hand, but its AI capex spend this year will be almost $200 billion. It has already issued more than $85 billion in debt over the last year, now this equity capital raise. 

* JOLT from the blue

U.S. 'JOLTS' data on Tuesday showed that job openings in April rose to the highest in two years. The increase was the fastest in five years. There is clearly demand for workers, and so far at least, very little evidence that AI is destroying jobs. But is the labor market as tight as this suggests?

Perhaps not. Some 90% of the openings was concentrated in one sector, professional and business services. The rate of hiring, layoffs and quits fell too, a sign of a stagnating rather than buoyant market. As ever, something for everyone in the numbers, as eyes turn to May's payrolls report on Friday.

* ECB June hike baked in

Euro zone inflation is above 3% for the first time since September 2023, figures on Tuesday showed, virtually sealing the deal on a 25-basis point rate hike from the ECB next week. Traders are leaning towards a further 50 bps of tightening by the end of the year.

Assuming the ECB does move next week, it will join the G10 central banks of Australia and Norway in raising rates, and a growing clutch of authorities in emerging economies. The Bank of Japan is also expected to tighten next week. How long before markets are fully pricing in a rate hike from the Warsh Fed?

Many of the biggest winners from the current wave of AI mania lifting Wall Street to new highs aren't the multi-trillion-dollar hyperscalers, but small caps. The question now is whether that can last.

Small caps appear to be benefiting more from the AI capex boom than many had bargained for. Tech may only account for about 16% of the small-cap index – compared with the 'Magnificent Seven's' near-40% share of the S&P 500, but many of these smaller companies are considered part of the physical "picks and shovels" segment of the AI buildout. 

Small-cap benchmarks and subindexes - especially tech and energy - have outperformed their more heralded megacap peers. But while there are tailwinds, there are also potential headwinds.