AI Rally Powers Markets to Record Highs as Berkshire Bets Big on Housing

AI-Powered Rally Faces Fresh Tests

Global stock markets entered June at or near all-time highs, continuing a powerful run from May. However, this strength is not widespread. The rally is being driven almost entirely by a small group of companies linked to artificial intelligence, creating a dependence on their continued success. Dell provided a stunning example of this, with its shares jumping over 32% in a single day after reporting AI server sales had soared by 757%. But this narrow focus means any bad news carries extra weight, and several challenges are emerging.

The AI Frenzy Expands Beyond Data Centres

The investment mania is now pushing into new territory. Japanese investment group Softbank announced a massive commitment to build AI infrastructure in France, a move that helped make it Japan's most valuable company. The plan involves spending up to $87.5 billion (€75 billion) to develop data centres with a target of five gigawatts of capacity. An initial $52.5 billion will deliver the first phase by 2031, with Softbank working alongside French firms like Schneider Electric and EDF. This signals a major expansion of the AI build-out into Europe.

Simultaneously, Nvidia is making a strategic push into personal computers. At a major conference in Taiwan, the company revealed a new ARM-based processor for laptops, with a cryptic social media post from both Nvidia and Microsoft hinting at a major announcement. CEO Jensen Huang declared that Nvidia and Microsoft are set to "reinvent the PC," suggesting the AI revolution is moving from vast data centres to the consumer's desk. This has ignited a rally across the hardware sector, with Lenovo's stock doubling in May and HP also seeing gains as its sales of AI-enabled PCs climb.

However, this hardware boom is a double-edged sword. Soaring demand for high-performance memory for AI servers is creating severe supply shortages for consumer devices. The three main manufacturers—Micron, SK Hynix, and Samsung—have no significant new production capacity due until mid-2027, and their order books are reportedly full. This is hitting the lower-priced Android phone market particularly hard, with average prices rising by $100. HP has also warned its profit margins will face pressure later in the year, a clear sign that the hardware renaissance comes with significant costs.

Washington Tightens Grip on China Chip Sales

The US government has moved to close a loophole that allowed advanced AI chips from companies like Nvidia to reach Chinese firms through their overseas operations. Sales to these foreign subsidiaries will now require an export licence, effectively blocking them. While the move doesn't affect chips already sold, it adds a layer of persistent uncertainty for Nvidia, the market's undisputed leader, whose China business is now much harder to forecast.

Competition Heats Up

Nvidia's dominance is also being challenged from within the industry. Google is making progress with its own custom-designed AI chips, reducing its reliance on outside suppliers for some tasks. At the same time, reports suggest Nvidia's next-generation 'Rubin' platform is facing minor delays. While Nvidia remains in a commanding position, these developments show that the competitive landscape is shifting.

The next major test for this concentrated market rally will be Friday's US employment report. A surprisingly strong jobs number could delay expected interest rate cuts, potentially disrupting the positive sentiment that has lifted tech stocks.

Berkshire's £6.7bn Housing Bet Challenges Tech Hype

While tech stocks capture the headlines, Warren Buffett's successor at Berkshire Hathaway is making a significant move in the opposite direction. In his first major deal, Greg Abel has committed to spending $8.5 billion (approximately £6.7 billion) to acquire Taylor Morrison, a major US homebuilder. The figure includes the company's existing debt.

The all-cash deal, which values the company at $72.50 per share, represents a 24% premium to the homebuilder's recent stock price, which was trading near its 52-week low. This is a classic contrarian move from Berkshire, suggesting they believe the housing market is undervalued despite struggling under the weight of high mortgage rates. The news immediately raised speculation that other homebuilders could become takeover targets, especially given Berkshire's poor stock performance this year, which is lagging the S&P 500.

This move into physical assets provides a stark contrast to the market's current obsession with AI. It serves as a reminder that value can be found in 'old economy' sectors, especially those that have been overlooked during the tech boom.

The Hidden Risk in Emerging Markets

For years, investors have bought into emerging markets to diversify away from US tech stocks. That strategy may no longer work. A closer look at the MSCI Emerging Markets Index, a popular benchmark for these regions, shows it is becoming a mirror image of the AI-driven US market.

Nine of the index's ten biggest companies are now in the technology sector. Giant chipmakers like Taiwan's TSMC, along with Samsung and SK Hynix, now account for nearly 30% of the entire index. This means that buying a standard emerging markets fund is increasingly just another way to bet on the global AI boom, offering little real diversification.

In response, investors are turning to actively managed funds that deliberately look for opportunities outside of this tech concentration. These new funds are targeting areas like regional banks and commodity producers, or excluding countries like China, South Korea, and Taiwan entirely, in a bid to find investments that don't just follow the same path as the Nasdaq.

SpaceX IPO Looms as Private Valuations Falter

A new wave of major stock market listings could be on the horizon, led by Elon Musk's SpaceX, which is reportedly planning an initial public offering (IPO) that could value the company at over $2 trillion. The move highlights the vast sums of money chasing high-profile tech stories.

This enthusiasm for new listings, however, masks a serious problem in the private startup world. According to data from PitchBook, almost half of all US "unicorn" startups—private companies once valued at over a billion dollars—have not successfully raised new funding in the last three years. For those that last raised capital in 2021, valuations have collapsed by an average of 68%. This suggests a sharp divide between a few top-tier companies able to tap public markets and a large group of struggling firms left behind by the AI boom.

Cryptocurrency and Digital Assets Update

Recent developments show the crypto sector is being pulled in two directions: towards greater regulatory legitimacy in the US and Europe, while simultaneously being plagued by high-profile security failures and fraud.

US Regulators Open the Door to Institutional Products

In a landmark move, the US Commodity Futures Trading Commission (CFTC) has approved the first regulated crypto perpetual futures in the country. These are derivative contracts that don't have an expiry date, popular with traders. Both Kalshi and Coinbase received approvals, establishing a formal framework for products that were previously only available offshore. This follows CME Group's move to make its own crypto futures and options available for trading 24/7.

Separately, Paxos became the first blockchain-based firm to receive full SEC registration to clear and settle US stock trades. This means it can now compete with traditional institutions like the DTCC, using its blockchain technology to settle trades on the same day instead of the standard one-day (T+1) cycle. This could free up significant capital for large financial institutions and is a major step in the tokenisation of real-world assets.

Security Failures and Fraud Persist

Despite regulatory progress, the risks remain high. The SEC has charged a Texas man for orchestrating a $12.3 million Ponzi scheme through a company called Privvy Investments. He allegedly lured investors with false promises of massive returns from non-existent AI trading bots, using new investor money to pay off earlier ones.

In another incident, Gravity Bridge, a system designed to move assets between the Ethereum and Cosmos blockchains, was drained of approximately $5.4 million. Experts believe the attack was due to compromised security keys rather than a flaw in the code itself, highlighting that human and operational errors remain a critical weak point in the industry.

Market Sentiment and Regulatory Action

Investor sentiment shows signs of caution. BlackRock's spot crypto ETFs saw combined outflows of over $1.2 billion in the past week, indicating some institutional players are taking profits. Elsewhere, a US court order directed the stablecoin issuer Circle to freeze $12.6 million in a specific smart contract, a move that inadvertently locked funds for all users of that service, showcasing the complex legal challenges of on-chain finance.

Meanwhile, the European Union is reportedly planning to sanction the crypto payment systems that Russia has been using to settle oil trades and bypass traditional banking sanctions. This demonstrates a growing focus from global regulators on closing loopholes in the digital asset space.

Geopolitical and Economic Headwinds Persist

Beneath the surface of the market rally, several risks continue to simmer. Tensions in the Middle East, a shifting outlook on interest rates, and new signs of consumer weakness could pose significant threats to stability.

US-Iran Tensions Threaten Oil Prices

An expected truce between the US and Iran failed to emerge, escalating tensions in the Middle East. Recent US 'self-defense' strikes on Iran's Gulf coast and attacks by Iran's Islamic Revolutionary Guard on a US airbase in Kuwait are threatening regional stability. For markets, the primary concern is the price of oil. Hopes for a lasting de-escalation had helped push crude oil prices down nearly 19% in May. If the direct conflict widens, oil prices could rebound sharply, reigniting fears about inflation.

Consumer Spending Shows Signs of Strain

While the tech sector thrives, there are signs of trouble in the broader economy. Major retailers like Gap and American Eagle recently saw their stocks suffer double-digit drops after reporting weak sales. This trend suggests a more fundamental problem: a cautious consumer. Guidance from other major retailers like Walmart and Ross indicates that shoppers could face more economic pain ahead. With UK and US inflation remaining stubbornly high and households paying more for energy, it appears many are cutting back on non-essential spending, a worrying signal for the wider economy.

Deep Dive: The Real Story Behind Virgin Galactic's Surge

Shares in space tourism firm Virgin Galactic (SPCE) have tripled in recent weeks, but the volatile nature of the space industry was highlighted by the recent explosion of a Blue Origin rocket during a ground test. A closer look at Virgin Galactic's finances reveals a highly speculative picture.

The All-or-Nothing Bet on 'Delta'

Virgin Galactic is effectively a pre-revenue company. Its original spaceplane was not profitable and has been retired. The entire business case now rests on a future fleet of 'Delta' class ships, which are designed to fly more frequently and generate around $450 million in annual revenue with two operational vehicles.

However, building this fleet costs money the company does not have. It is burning through its cash reserves and has officially stated there is "substantial doubt" about its ability to continue operating for the next year without raising more funds. This will almost certainly mean selling more shares, which dilutes the value for existing shareholders.

A Sobering Valuation

Analysing the company's potential outcomes reveals a stark risk-reward profile:

• Base Case: If the two-ship 'Delta' plan works, a fair valuation might land around $7 to $10 per share after accounting for future share sales.
• Bull Case: A fully expanded four-ship fleet could justify a price closer to $20-$25 per share.
• Failure Case: There is a significant, arguably greater than 50%, chance of bankruptcy or a fundraising that wipes out current shareholders, meaning the stock could go to zero.

A blended valuation, weighting these different scenarios by their probability, suggests a fair value of around $10 per share. Crucially, about half of that value comes from a very low-probability 'moonshot' outcome. At its recent low of under $3, the stock offered a compelling gamble. At current levels near $7, the easy money has been made, and investors are now paying a much higher price for what remains a long-shot bet.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).