CNBC Daily Open: It's AI's world and the Fed's just living in it

U.S. equity markets are currently experiencing a significant AI-driven rally, with the S&P 500 and Nasdaq reaching record highs, largely propelled by companies like Nvidia and overshadowing other macro concerns. However, the Bank of England has cautioned about "stretched" valuations in the AI sector, suggesting potential market vulnerability if expectations cool. Concurrently, HSBC announced a $37 billion plan to take Hang Seng Bank private, resulting in a nearly 30% surge in its shares, while Softbank completed a $5.4 billion robotics acquisition.

Analysis

Taken from CNBC’s Daily Open, our international markets newsletter — Subscribe today Investors barely flinched Wednesday, despite the release of the Fed minutes and the ongoing U.S. government shutdown. Discussions on rate cuts and shutdowns seemed to be mere background noise compared to the real force moving markets now, namely, artificial intelligence. AI stocks such as Nvidia are now masters of the market narrative, driving record highs across the S&P 500 and Nasdaq. On the flip side, Oracle became the proverbial straw that broke the S&P500's seven-day winning streak Tuesday stateside. But, to paraphrase Spider-Man, with great power, comes great scrutiny. The Bank of England warned that valuations appear "stretched," particularly for AI companies, adding that equity markets could be particularly exposed should expectations around the impact of AI become less optimistic. For now, Wall Street remains in hyperdrive, fueled by AI's promise and the hope that the Fed will keep cutting rates. Investors may soon need to reckon with whether this AI-fueled rally is built on solid ground or it's swinging toward a cliff. What you need to know today Israel, Hamas reach 'first phase' plan. U.S. President Donald Trump said that both parties have "signed off" on the first phase of his peace plan. Under the plan, Trump said that all hostages will be released and Israel will withdraw forces to an "agreed upon line." HSBC to take Hang Seng Bank private. HSBC announced plans to take subsidiary Hang Seng Bank private, valuing the lender at more than 290 billion Hong Kong dollars (over $37 billion). Shares of Hang Seng Bank shares jumped 29.5% Thursday. Nvidia CEO surprised at 'clever' AMD deal. CEO Jensen Huang said Wednesday that he's surprised Advanced Micro Devices offered 10% of itself to OpenAI as part of a multibillion-dollar partnership announced earlier this week. "I'm surprised that they would give away 10% of the company before they even built it. And so anyhow, it's clever, I guess," he said. S&P 500 and Nasdaq rebound to record. Both indexes notched new all-time intraday and closing highs Wednesday stateside. The broad index was powered by the information technology, utilities and industrial sectors. Markets were mixed in Asia. Shares of Softbank Group jumped 13% after it announced a $5.4 billion deal to buy the robotics division of Swiss engineering firm ABB. [PRO] Best ways to gain gold exposure. As the bullion hits new highs, industry experts say there is still room for gold to to run, with one analyst saying that gold could reach $5,000 per ounce by 2026. Here are the best ways to gain exposure to the yellow metal. And finally... Will Takaichi’s ‘Abenomics’ weaken the yen and raise the ire of Trump? For years, U.S. President Donald Trump has accused Japan of engaging in "unfair trade practices" — a criticism that dates back to his days as a real estate mogul. In March, Trump again singled out Japan, alleging that Tokyo weakened its currency to gain an unfair trade advantage. Now, as Abe's protégé, Sanae Takaichi, is poised to helm the world's fourth-largest economy, the same concern could be rearing its ugly head again. — Lim Hui Jie The U.S. equity market is currently in an AI-fueled rally, with the S&P 500 and Nasdaq reaching record highs, largely propelled by companies like Nvidia (NVDA) and overshadowing other macro concerns like Fed minutes. However, the Bank of England has issued a caution, noting that valuations, particularly for AI companies, appear "stretched," raising concerns about market exposure should AI expectations diminish. This highlights a significant divergence between current market momentum and underlying valuation risks. Separately, Oracle (ORCL) briefly interrupted the S&P 500's seven-day winning streak, indicating some sector-specific volatility amidst the broader AI enthusiasm. In M&A news, HSBC (HSBC) announced plans to take Hang Seng Bank private in a deal valuing the lender at over $37 billion, leading to a substantial 29.5% jump in Hang Seng Bank shares. This demonstrates significant capital deployment and immediate value realization in specific financial sector transactions. Furthermore, Softbank Group (SFTBY) shares surged 13% after a $5.4 billion acquisition of ABB's (ABB) robotics division, underscoring ongoing strategic M&A activity outside the immediate AI chip narrative. Nvidia CEO Jensen Huang's surprise at AMD's (AMD) deal with OpenAI highlights the intensifying competitive landscape and strategic positioning within the AI supply chain. Despite the mixed sentiment, the S&P 500's rebound was powered by information technology, utilities, and industrial sectors, suggesting some breadth beyond pure AI.

Key Decisions for Investors

• Monitor AI sector valuations closely for signs of a correction, especially given the Bank of England's "stretched" caution and mixed market sentiment.
• Evaluate portfolio exposure to AI-driven growth versus diversified investments in other strong sectors like industrials and utilities, noting the S&P 500's rebound breadth.
• Consider the potential for M&A-driven alpha, as evidenced by significant share movements in companies like Hang Seng Bank and Softbank following their respective deal announcements.