Macro

JPMorgan Sees AI Sparking Commodity Buys Amid Inflation Concerns

AI's infrastructure build-out drives commodity demand, inflating prices, with long-term efficiency gains expected to counteract inflationary pressures.

By Athena Xu

5/15, 07:35 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Alphabet Inc.
HP Inc.
Johnson & Johnson
JP Morgan Chase & Co.
Meta Platforms, Inc.
ONEOK, Inc.
Williams Companies, Inc.
article-main-img

Key Takeaway

  • JPMorgan clients are investing in commodities, anticipating AI infrastructure build-out to drive initial demand and inflate prices.
  • The firm predicts AI will first cause inflation through increased demand for energy and equipment, then deflation as efficiencies are gained.
  • Amidst Fed rate uncertainty, investors focus shifts from rates to commodities and equities, with JPMorgan strategizing on private credit expansion.

AI's Dual Impact on Inflation

JPMorgan Chase & Co.’s new global co-heads of sales and research, Claudia Jury and Scott Hamilton, have highlighted the dual impact of artificial intelligence (AI) on inflation. Initially, the infrastructure build-up required for AI technology is expected to be inflationary, driving up demand for commodities such as energy and equipment. This is evidenced by the Bloomberg Commodity Spot Index, which saw an almost 8% increase this year. "The build-up is inflationary," Jury stated, emphasizing the need for power, CPU, and grids. However, in the longer term, AI is anticipated to have a deflationary effect as companies leverage the technology to enhance efficiency.

Investment Shifts and AI's Role

Investors are recalibrating their focus towards commodities and equities, partly due to the inflationary pressures from AI's initial rollout. Despite the Federal Reserve's efforts to manage inflation, the anticipation of AI's infrastructure demands has buoyed commodity prices. JPMorgan's leadership, including CEO Jamie Dimon, is preparing for a wide range of outcomes in interest rates, reflecting the uncertainty in the market. The firm is also paying close attention to the growing influence of non-banks in areas traditionally dominated by investment banks, such as private credit and bond trading, indicating a shift in competitive dynamics within the financial industry.

Utilities Sector Responds to AI Demand

The utilities sector is experiencing a surge in interest due to the expected increase in electricity demand from AI data centers. Wells Fargo reports an 8% growth in the S&P 500 utilities sector in the second quarter of 2024, with companies like Williams Cos. and Oneok benefiting from the AI data center buildout. The demand for natural gas, essential for backing up renewable energy sources, is projected to significantly increase, highlighting the sector's critical role in supporting AI infrastructure.

Strategic Investment in Dividend Stocks

Amid the market headwinds, investment strategies are increasingly focusing on dividend stocks. Wolfe Research recommends companies with high dividend growth and strong cash flow, such as Johnson & Johnson and HP Inc., as a way to navigate the challenging economic environment. The pivot of tech giants like Alphabet and Meta towards initiating dividends reflects a strategic shift towards value-oriented business practices. This approach is underscored by the bullish outlook on U.S. stocks from Goldman Sachs, which has revised its S&P 500 earnings forecasts for 2024 and 2025, signaling optimism in the market's resilience and growth potential.

Street Views

  • Claudia Jury and Scott Hamilton, JPMorgan Chase & Co. (Neutral on AI's impact on inflation):

    "The build-up is inflationary because of the infrastructure and everything you’re going to need to rely on in the future in terms of power, CPU, grids — things like that." "Later it will be deflationary as companies use AI to become more efficient."