As markets gyrated to Trump’s ad-hoc announcements, investors on Wall Street found inspiration in the AI boom. Expectations are that AI will be the game changer that will fundamentally and dramatically reshape the economy and drive earnings higher.
The major US indices are currently trading near new record highs, led by the “Magnificent Seven” tech giants — Microsoft, Apple, Amazon, Alphabet, Nvidia, Meta and Tesla. At the time of writing (Dec 12), the Dow Jones Industrial Average is up 13.9% year to date, while the broader S&P 500 index is up 16.1% and Nasdaq Composite has surged 20.1%.
The AI boom has also spread to other markets with high technology representation, notably South Korea and Taiwan, where benchmark indices are up some 73% and 22% respectively. Even China, which is battling a bruising trade war with the US, has seen a 16% gain for the Shanghai Composite Index, thanks to its burgeoning AI and tech sectors.
Malaysia’s stock market in the doldrums
In sharp contrast, the Malaysian stock market remained in the doldrums.
The FBM KLCI is roughly where it started at the beginning of 2025, In fact, the FBM KLCI has been unchanged for the past 13 years —– making it one of the world’s worst performing markets. The FBM KLCI hit an all-time high of 1,896 in July 2014 — but is now hovering just above the 1,600 level (see Chart 1).
See also: The AI rational bubble: Speculative speculation but existential necessity
Unlike 2024, when excitement in data centres spurred gains in construction and property stocks, there were no major catalysts in 2025. And unlike the US, China, South Korea or Taiwan, we have no major tech sectors. On the other hand, tariff uncertainties and cost pressures have dampened the manufacturing sector and squeezed profit margins for most companies.
A major problem is that our largest listed companies are still engaged in old, asset-heavy businesses, many of which are domestic-centric and protected by high non-tariff barriers to entry. For instance, technology stocks account for only 4% of our market capitalisation. A look at the comparative year-to-date sectoral performance of Bursa Malaysia versus the S&P 500 shows how poorly our sectors have performed (see Charts 2 and 3).
Out of Bursa Malaysia’s 13 sectors, 10 are in the red and only three are in the black — REITs (up 7.3%), plantation (up 6.6%) and financial services (up 0.3%). That these three are sectors offering yield but hardly any growth is quite telling of the choice investors have on the local bourse. Among the 10 sectors in the red, the biggest losses are healthcare (down 36.4%, due to the glove makers), technology (down 12.1%) and telecommunications (down 11.3%).
Interestingly, Malaysian technology stocks have performed very poorly, in sharp contrast to the US’, where they are the main drivers of the stock market rally. On the S&P 500, the IT and communication services sectors are the two best performers (up 22.5% and 30.6% respectively; see Chart 3). These two sectors house the “Magnificent Seven” stocks.
Malaysia is slow to move up the value chain, continuing to rely on low-skilled labour and creating low-skilled jobs. This has resulted in low margins for our listed technology companies, which occupy the lower-value end of the global supply chain.
But does that mean a “lost cause” situation for the Malaysian stock market? No. As we have long argued, there are many ways to create shareholder value, even for “old economy” companies. For the country, we must think out of the box and focus on areas where we have some competitive advantages. We will explore more on these topics in the coming weeks.
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Looking ahead
Despite lofty valuations, the US stock market continues to be fuelled by AI, hopes of easing trade tensions, upbeat earnings and expectations of further interest rate cuts.
The million-dollar question: Is the AI-driven rally a bubble and will it burst?
We believe AI is a generation-defining technological innovation that will reshape the economy and our lives. We have written extensively on the topic. There is no doubt AI will drive earnings and margins higher as companies restructure the way they do business. And earnings ultimately drive the stock market. However, the big question is how transformative its impact on future earnings will be and how long will it take? These, unfortunately, are still difficult to quantify.
Expectations on the impact of AI can already be seen in the earnings forecasts for S&P 500 stocks, which have been progressively raised higher, especially for 2026 and 2027 (see Chart 4). According to FactSet, consensus forecasts are for 14.5% earnings per share (EPS) growth in 2026, led by the “Magnificent Seven” stocks. Profit margins are expected to grow for most sectors, as companies adjust their cost structures through investment in AI and strategic layoffs.
At the same time though, the same chart also shows that the S&P 500 has run quite ahead of the earnings forecast revisions. The S&P 500 is now trading at a forward price-earnings ratio (PER) of about 22.1 times for 2026, compared with its five-year historical average of 20 times and 10-year historical average of 18.7 times.
Consensus forecasts are calling for a further 13% earnings growth in 2027. This will bring the forward PER by next year to around 20 times for 2027 — in line with the five-year historical average, but still above the 10-year historical average. This implies, by historical norms, that the stock market may have already priced in 2027 earnings.
Optimists will argue that AI is a “new norm” and historical norms no longer apply. However, this “new norm” argument has also been used many times before, including during the dotcom cycle. Ultimately, the stock market is driven by earnings.
While Wall Street is fixated on AI, one also has to keep a close watch on Main Street — especially jobs and consumer spending. AI will make companies more efficient but will also replace jobs, which could in turn curtail consumer spending — the main driver of the US economy.
The US jobs market is cooling but not severely deteriorating yet. Jobs creation is still positive but has slowed very significantly, with monthly non-farm payroll growth in 2025 averaging only half of 2024 levels. The unemployment rate rose to 4.4% in September, the highest since 2021.
Meanwhile, US consumer confidence is also weakening, although this could have been exacerbated by the recent extended government shutdown. On the other hand, inflation remains high, at 3% in September, above the US Federal Reserve’s 2% target, and will remain elevated due to Trump’s tariffs. All these factors will be closely watched in the coming year.
How about Malaysia?
A softening of the US labour market and economic conditions will result in lower US interest rates, which has implications for the US dollar, which has already started to depreciate. A lower US yield — and if Wall Street’s rally stalls — could encourage diversification of global capital flows.
Since September 2024, the Fed has cut interest rates from 5.5% to 3.75% with at least another cut expected in 2026. This narrows the yield gap with Malaysia, where interest rates have been relatively stable. Malaysia’s benchmark overnight policy rate stands at 2.75% after a 25bp cut in July 2025 — its first reduction in five years.
In the past few months, the ringgit has appreciated strongly against the US dollar, thanks to foreign portfolio inflows. The ringgit is currently trading at 4.09, its strongest level since 2021. Year to date, it has appreciated by about 9% and is the best performing currency in Asia. We have written extensively on the ringgit’s rally in recent weeks — the driving factor being short-term portfolio inflows. Do check the articles out.
These portfolio inflows have focused on the bond market, rather than the stock market, which continues to see foreign selling. November saw net foreign portfolio inflows surging to RM4.9 billion from RM1.7 billion in October. This was driven by foreign purchases of Malaysian debt securities of RM6.1 billion, up from RM4.4 billion in October. There was still foreign selling in equities, albeit lower at RM1.1 billion in November compared with RM2.7 billion in October.
The stock market could benefit if there is a rebalancing of foreign investors’ portfolios — if foreign investors eventually switch from bonds to stocks. We believe portfolio flows — rather than a general appeal of Malaysian stocks — will be the main driver for the stock market.
On a macro level, strategic plans under the 13th Malaysia Plan and Budget 2026, low inflation, stable monetary policy, ongoing fiscal reforms, improving current account surplus and stronger foreign reserves — are all positive in the short term, although longer-term issues remain.
On a more thematic level, there could be interest in companies associated with data centres, the Johor-Singapore Special Economic Zone (JS-SEZ) as well as infrastructure developments in Sarawak and Sabah, as the East Malaysian states derive a larger share of state revenue. The plantation sector should continue to see high palm oil prices amid tight supply and land seizures in Indonesia. Banking stock should continue to provide stable earnings and yield.
Every year, we analyse the over 1,000 stocks on Bursa Malaysia to come up with our top 10 picks of the year. As we wrote last week, our top 10 picks for 2025 generated a gain of 10.3% — about 2.5 times more than the FBM KLCI’s 3.9% return. Over the last 11 years — since 2015 when we first started the annual Top 10 Picks — our gains have averaged 22.9% per year. Do subscribe to Absolutelystocks.com to find out what are our Top 10 Picks for 2026.
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