The Summer of AI: Why the Stock Market Rally May Continue
As the stock market continues its upward trajectory, some experts are dubbing this season as the Summer of AI. With the S&P 500 up 14% this year, there are reasons to be cautious, but Trivariate Research Founder Adam Parker sees three key factors that could keep the gains coming.
Firstly, financial conditions remain relatively easy, with plenty of private credit offsetting the lack of lending from banks. The Bloomberg Financial Conditions Index has only been easier 8% of the time in the past three and a half decades.
Expanding margins are also contributing to the rally, with analysts expecting three-quarters of the top 500 U.S. stocks to see margin growth due to various factors. This trend was evident in the first quarter, with net margins improving for eight of the S&P 500’s 11 sectors year over year.
The third pillar supporting the market’s gains is the promise of artificial intelligence. While it may still be difficult to pinpoint AI winners or understand its full impact on corporate productivity, the dream of revenue growth without net hiring is powerful enough to drive the market forward.
Despite concerns about market concentration, Parker believes that investors should not shy away from the AI trade, even if it comes at a premium. Avoiding tech giants like Microsoft, Nvidia, and Apple could be a missed opportunity, as the market continues to assign a higher probability to long-term earnings growth fueled by AI.
DataTrek’s Nicholas Colas suggests that the S&P 500 is a less volatile way to play potential winners and losers in AI compared to more tech-heavy bets like the Nasdaq 100. By investing in the S&P 500, investors can join those who are supporting the index’s rise, which is likely to attract more funds through passive investing.
While the party may not last forever, investors can see that it isn’t quite over yet. The Summer of AI may just be getting started, and the stock market rally could have more room to run.
