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New York CNN –
Wall Street has a lot to worry about – recession and war in Europe, rising interest rates, stagnant inflation, and a slowing US economy.
But there’s at least one area of market excitement that’s keeping investors optimistic: artificial intelligence.
Last Thursday, the S&P 500 entered a bull market — up 20% from its recent lows. In a note Friday, economists at Bank of America said the upward move is because most investors have bought into a singular equity theme: AI.
“Recent developments in generative AI herald a sea change,” he wrote.
But market strength is mostly driven by a handful of mega-cap tech stocks, Alphabet (GOOGL), Meta (META), Apple (AAPL), Amazon (AMZN), and Nvidia (NVDA). That’s why the tech-heavy Nasdaq (up 27%) and the S&P 500 (up 12%) are up much more this year than the Dow Jones Industrial Average (up just 2%).
Returns from those five tech stocks this year are the biggest in two decades, said Matt Bartolini, head of SPDR Americas research at State Street Global Advisors. This year, Nvidia’s stock is up 165%. Meta is up 120%. And Apple, Amazon and Alphabet are all up about 40%.
Earlier, Bell spoke with Bartolini about what the AI boom means going forward and whether investors should be wary.
This interview has been edited for length and clarity.
Before Bell: AI is creating a huge market boom right now, but this boom is also concentrated in mega-cap tech stocks. Can he last?
Matt Bartolini: The stocks that we talk about in the AI craze are all going to be technology related, and these large cap companies are going to be influencing AI and a lot of their capabilities. AI is a very nebulous subject, many people like to think of it as just ChatGPT, but it can also refer to predictive text on your iPhone.
It is more about how technology has spread across a wide variety of industries and consumer sectors. We’ve seen a flight to quality this year that has benefited firms that have strong balance sheets with sustainable, repeatable cash flows. And these mega cap tech conglomerates are those types of firms. So the growth in semiconductor stocks is certainly driven by AI, Nvidia being one of them, but I think it’s narrow market leadership trying to find companies that have good cash flow characteristics. And yes, and those are only the largest firms.
A lot of companies are claiming to work in the artificial intelligence space. How can investors tell which companies are really going to benefit from the potential AI boom?
This is the most difficult thing to do right now. We often see this happen during the tech frenzy. A Long Island Iced Tea Company Changed Its Name to ‘Long Island Blockchain’ and Its Stock Soared 200%. Pets.com popped up in the dot com boom. This is a song as old as time. If you look at recent earnings transcripts from S&P 500 companies, AI was mentioned everywhere.
So to some extent it’s just a buzzword that companies use to gain notoriety and inject a little optimism into their forward guidance. Still, many companies are using AI as a connective technology.
I hate to use the “B” word but I wonder if this is a bit bubble?
I don’t think we are there yet. I’m not saying we won’t be, but I think there’s some restraint in that. If there was a bubble, you would see more retail investors using ETF structures to focus on specific themes or those with AI in their names. They’ve got a little bit of flow but not to the level where you’d say ‘something’s up here.’
You have a very narrow, short-sighted market in terms of companies leading the way on AI. Many large tech stocks have performed well, but smaller companies have not done as well. In a bubble, you’ll see a large amount of stocks gain across the sector.
What’s happening is that AI has been around for a really long time, and is now a branding bubble, so to speak, where it’s the subject of a lot of press and general conversation around the dinner table. But I don’t think we have reached a full scale bubble from a stock perspective.
So what would you say to a Main Street investor who is looking to invest in AI?
At the beginning of the year we identified semiconductors as one sector of the market that was trading below its perceived fair value due to so many poor returns in 2020. The entire industry was trading below its historical price to earnings ratio but now it is trading above it.
What I would say to those investors is that if you want to get into the AI industry, it’s really easy to get the theme call right, but the stock call wrong. You buy a semiconductor stock because you think it’s going to be a home run, but the firm may have an accounting problem. So instead of buying single stock equities to drive a theme, we discuss with investors about using focused industry exposures that allow you to diversify that single stock exposure. On average, stocks underperform the sector average.
The US finally entered a bull market last Thursday. It took 165 trading days for the S&P 500 to recover 20% from its recent low – technical qualifications for a bull market. According to Adam Turnquist, chief technical strategist at LPL Financial, this is the second longest period between bull markets in nearly 75 years.
This bull market may be with us for a while. While the duration of past bull markets has varied greatly, they have generally been long lasting. Turnquist said that since 1929, the average S&P 500 bull market has lasted 39.4 months – or a little over three years – and has generated an average gain of 130.1%.
Short term returns are also strong once the market crosses the 20% range. They found that the S&P 500 posted average and median gains of 18% and 19% in the 12 months after the index entered a bull market.
A bear in bull’s clothing: A 20% gain from recent lows is generally accepted as the definition of the start of a bull market. However, there is no precise definition – and current market conditions are a bit more nuanced than the typical bull market-bear market binary.
If there is a pullback or consolidation in tech stocks, there could be a sharp drop in the market.
On the surface, Big Tech is “solving” the market’s problems, but cyclical and smaller companies are suffering underneath.
This narrow market lead by AI-adjacent tech stocks is “not a sign of a quality rally or bull market,” and James Demert, chief investment officer at Main Street Research, warned that some sort of market correction could be on the way.
Nevertheless, participation in the latest rally has increased recently and nearly 58% of all S&P 500 stocks are trading above their 200-day moving averages, Turnquist noted. “This is a step in the right direction, especially with significant improvements across the breadth of the financial and energy sectors,” he said.
It’s all about central banks this week. Policy officials are expected to meet in the US, Eurozone, Japan, Taiwan and Hong Kong.
Investors are particularly focused on economic forecasts and the latest interest rates as recession roils Europe and the Chinese and US economies To soften
Here’s what’s coming:
▸ The Federal Reserve is widely expected to pause its rate hike regime on Wednesday, at least for the time being. But as is often the case on Wall Street, investors have already turned their attention to what comes next.
There is a growing consensus among traders that the June pause will be short-lived and that the Fed will raise rates again in July. Further estimates and views from Fed Chair Jerome Powell will be important, economists at S&P Global Market Intelligence wrote in a recent note. He said investors would also watch for stable service sector inflation and the Fed’s stance on a flexible job market.
▸ Investors expect the European Central Bank to raise interest rates by another quarter percentage point on Thursday. But the Eurozone has entered recession and prices are starting to cool – now there is growing uncertainty about whether the ECB will continue hiking after this meeting.
Average prices charged by manufacturers fell for the first time in three years this May, but service price inflation remained high, which policymakers noted as a “worrying trend,” analysts at S&P said.
▸ Central bank meetings in Japan, Taiwan and Hong Kong will also be held this week, with no surprises expected, he added.
Source: amp.cnn.com
