Inside the correlation between AI and deflation

• The Federal Reserve is unlikely to hike interest rates, as current market conditions (moderating oil prices, flat yield curve) suggest a restrictive stance is already in place.
• Recent inflation was primarily supply-driven (e.g., COVID, Ukraine war, tariffs), which should be viewed differently than demand-driven inflation and is expected to abate.
• While AI currently drives up costs for chips and data centers, it is expected to be deflationary in the long term by making goods cheaper and more abundant.
• Investment recommendations include small caps, REITs, financials, industrials, and emerging markets, as the market rotates towards these sectors in an anticipated easing cycle.

Invesco Global Market Strategist Brian Levitt believes the Federal Reserve is unlikely to hike rates, as inflation expectations and oil prices have moderated. He differentiates between supply-driven and demand-driven inflation, arguing that recent price increases were largely supply-driven and are now abating. Levitt recommends investors focus on small caps, REITs, financials, industrials, and emerging markets, anticipating an easing cycle and broader economic growth.