🎙️ New Balance of Power

Another day, another fresh record high for stocks. What keeps pushing equities higher this year?

• Optimism over a resilient economy

• Improving corporate earnings

• Anticipated rate cuts

• Ebbing inflation

• AI fervor

That’s it, folks. That’s the narrative through nearly six months of the year.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• How Microsoft built an AI empire

• The impact of the political drama in France

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

🤖 How Microsoft Has Built an AI Empire

Microsoft shares — up 21% this year — hit another new record high on Monday, thanks largely to the company’s lead in the artificial intelligence arms race. It’s become a $3.3 trillion tech giant, a key member of the Magnificent Seven, and a pretty big chunk of many investors’ portfolios. 

One man in the spotlight: CEO Satya Nadella, who bet the future of Microsoft on the potential of AI when he forged a groundbreaking partnership with OpenAI, the creator of ChatGPT. Yet Nadella has wanted Microsoft to be an AI empire for decades, and he knows the OpenAI deal won’t be enough. 

AI expansion: Nadella has been spreading Microsoft's bets, making the company arguably the world's most aggressive amasser of AI talent, tools, and technology. He’s hunted down new partners around the globe and invested in a range of AI startups, including pouring $1.5 billion into an Abu Dhabi-based firm. 

An OpenAI competitor: Nadella has also begun building what amounts to an in-house OpenAI competitor inside Microsoft — potentially putting it on a collision course with its most important partner. He recruited Mustafa Suleyman, a longtime rival of OpenAI's co-founder, Sam Altman, to lead Microsoft's AI efforts.

• Suleyman and his team from Inflection AI have led the process of training their own AI model, built on technology developed at Inflection and designed to be on par with the OpenAI technology Microsoft depends on today.
  

• Future Microsoft AI products could be switched from OpenAI technology to the model being developed by Suleyman's team.

New balance of power: Nadella's approach to AI is symbolic of his decade at the helm, during which he has repeatedly reinvented big parts of Microsoft, picking new partners and retooling the tech company after a so-so decade in the 2000s. He’s spotted when one-time company strengths became vulnerabilities and upend even his strategies, helping Microsoft add more and more value to shareholders. 

• Microsoft's moves have helped it leapfrog others—notably the longtime AI front-runner Google—to release AI chatbots and workplace tools expected to change how people think and work.
  

• Regulators are investigating Microsoft’s acquisitions and investments, worried it may already have too much control of the AI market. And, despite a soaring stock price, company morale has struggled as outsiders have been brought in to reshape aspects of its technology, per The Wall Street Journal. Some key executives have left the company amid organizational changes.

Why it matters:

When Nadella became CEO in 2014, Microsoft was mired in infighting among siloed groups and plagued by a "not-invented-here" syndrome. Nadella pushed for more internal cooperation with fewer centers of power and embraced other tech giants more than his predecessors.

• In 2019, Microsoft's chief technology officer, Kevin Scott, expressed concerns that the company's AI infrastructure was far behind Google's and that tools like Gmail autocomplete were getting "scarily good."
  

• In 2018, Nadella met OpenAI's Altman and was impressed with the startup's AI. Microsoft invested $1 billion in OpenAI, and that decision to prioritize OpenAI's AI technology rippled through Microsoft. The effects are still playing out today as AI advances at a blistering pace. 

Shareholders stay happy: Microsoft shares are up about 33% in the past 12 months and 227% in the past five years.

Read more

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💰 Nvidia to get 20% weighting and billions in investor demand

🤯 Private equity firms have avoided taxation on over $1 trillion of income

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🇫🇷 The French Right Wing Triggers Fear in Markets

We’ve talked quite a bit about U.S. markets lately, but the political upheaval in France has drawn the attention of investors worldwide. 

Specifically, investors are concerned that France could face a financial crisis if the right-wing populists gain control of the European Union's second-biggest economy in the upcoming parliamentary elections. President Emmanuel Macron called for these snap elections on Sunday after his party lost to the right wing in the EU parliamentary vote, which rattled the markets for French stocks and government bonds.

One the rise: There’s been widespread speculation that the National Rally, the party of right-wing leader Marine Le Pen, is poised to become the most powerful force in parliament, unseating Macron's centrist bloc. That outcome could make it harder to reduce France's massive government debt pile, equal to 110.6% of its gross domestic product (GDP) at the end of last year, and could even add to it.

Budgetary challenges: A bitterly divided parliament would also struggle to cut the budget deficit – the gap between government spending and tax receipts – which reached 5.5% of GDP last year. 

Market reaction: French government bond yields have spiked, with the spread over safer German bonds widening to over 80 basis points, the largest gap since 2012. 

• The French stock market benchmark CAC 40 index plunged 6.2% last week, its worst weekly performance since March 2022, wiping out around €187 billion ($258 billion) in market cap. Major French banks like BNP Paribas and Société Générale saw heavy selling.
  

• France lost its position as Europe's largest stock market to London. The UK's market capitalization is $3.18 trillion compared to $3.13 trillion for Paris.

Economists warn that if Le Pen pursues her expensive fiscal and protectionist agenda, the result could be a financial crisis similar to the one faced by the UK under former Prime Minister Liz Truss.

Rising borrowing costs: France's finance minister, Bruno Le Maire, acknowledged the risk of a financial crisis because of political turmoil. He noted that France now has to pay a higher interest rate than Portugal to borrow from investors, reflecting uncertainty surrounding the parties' plans and their ability to finance debt.

Why it matters:

Credit rating agencies are monitoring France, one of the EU's three most indebted countries. S&P recently downgraded France's long-term credit score, citing the deterioration of its budgetary position, although it still believed France had ample capacity to repay its debts.

Investors are worried that Le Pen's proposed policies, such as raising public spending, cutting fuel and electricity taxes, and her protectionist "France first" agenda, could strain France's already high debt levels and derail fiscal consolidation plans. 

• Credit rating agencies like Moody's have warned this would be "credit negative" for France.
  

• The prospect of political upheaval already roiled the markets. The yield on France's benchmark 10-year government bonds has risen, and the premium demanded by investors to hold French government bonds instead of German bonds has reached its highest level since 2017.

Bottom line(s): If the National Rally implements its promised measures, such as raising public spending and slashing VAT (the Value Added Tax, or VAT, is the EU’s general, broadly-based consumption tax assessed on the value added to goods and services) on electricity and fuel, it could further strain public finances.

• The European Central Bank has so far refrained from intervening and has assessed no systemic risks, but markets remain fragile ahead of this summer's two-round elections.

Read more

Quick Poll

On Friday, we asked: Are you invested in Cava or Chipotle stock? Why or why not?

— Most respondents aren’t invested in either company. “Valuation is too high for Cava, and as they add stores, the business operations become more challenging. This creates a lot of headwinds, and Chipotle will struggle to maintain the growth over the longer term.”

— Another said, “I looked at all the statistics on both those stocks, and neither one is of any interest. For example, the P/E ratio and Beta on Cava is out of this world.”

See you next time!

That's it for today on We Study Markets!

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