AI stocks mask broader market weakness: UniSuper

Artificial intelligence (AI) helped buoy major US technology stocks in September, masking broader weakness across equity markets as rising bond yields, higher interest rates and surging energy prices weighed on investor sentiment.

Australian shares fell more than 3% during the month, with 10 of the market's 11 sectors declining. US shares lost 0.5%, but UniSuper head of fixed interest David Colosimo said the headline figure obscured deeper weakness, with the equal-weighted US market falling more than 5%.

"If you take that out, the US was just as weak or maybe even weaker than Australia," Colosimo said.

AI infrastructure was a key source of support, with the semiconductor index gaining 10% and Meta rising 27% following the release of new products, including its AI assistant, Muse. However, Colosimo said the technology could also challenge established business models, with Expedia falling 17% and Amazon declining 4% amid concerns about AI- driven disruption.

"I put it down to two things; the surge in oil prices... and the second thing is the increase in bond yields," he said, pointing to rising energy costs and higher borrowing costs as key pressures on markets.

Colosimo said persistent oil supply constraints were adding to inflation risks, warning that "that'd be a real headwind to growth and further entrench these inflationary pressures."

Bond yields have risen across major economies, reflecting higher inflation expectations resilient growth and borrowing to fund AI investment. "You've got higher inflation and resilient growth, it's just been a recipe for rate hikes by central banks," he said.

Australian mining stocks also struggled amid concerns about Chinese demand and global growth, with BHP, Rio Tinto and Fortescue falling between 5% and 8%.

Looking ahead, Colosimo said US corporate earnings and the upcoming midterm elections would be key market considerations in October, alongside inflation data and central bank decisions.

While further US rate rises remain a possibility, he said the Reserve Bank of Australia may pause to assess the impact of its latest increase, with its next move dependent on incoming inflation figures.