The unexpected rally in the stock market has given investors a reason to be wary. However, the recent slump in all three major indexes does not spell the end of the upswing. Stocks still have a long way to go.
While the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all fell during the past week, ending notable winning streaks, the S&P 500 remains up 13% in 2023. So, what is contributing to these exceptional gains?
It’s hardly a secret. The big seven stocks- Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla, and Meta Platforms- have been leading the charge for market capitalization. They’ve increased by an average of 25% since Nasdaq began its winning streak eight weeks ago and by 14% since Nvidia reported remarkable quarterly numbers on May 24th.
Even in a down week, three of the seven saw increases in their stock values. All but Microsoft and Tesla outperformed the S&P 500.
According to Brian Rauscher, head of global portfolio strategy at Fundstrat, it isn’t entirely AI that is driving financial gains. The “magnificent seven” have all cut costs at the beginning of the year. As a result, improved earnings estimates for 2023 and 2024 demonstrate the impact cost-cutting has had on Wall Street projections.
Undoubtedly, AI will provide significant advantages to the stocks relying on it. Still, for Rauscher, there is no immediate need to worry about a dot com-type bubble approach. Regardless, the continued growth of these stocks looks sustainable for months to come.
AI’s Potential yet to be Reflected in Stocks
According to Francisco Bido, a portfolio manager at Integrated Alpha, Microsoft’s current stock trading reflects its present fundamentals and not AI optimism. However, Bido expects that Microsoft’s stock has 20% to 30% ahead of it since it will benefit from the AI movement.
Investors should beware when silly acronyms and novel valuation methodologies begin to surface as signs of bubble territory. Such was the case during the dot-com boom, where investors paid more attention to eyeballs and clicks rather than actual earnings and earnings growth. Watch out for talk turning to “exaflops to market cap.”
Fear of missing out (FOMO) about AI is still in its beginning phases. Rauscher expects a brand-new valuation methodology or some new AI metric before the year ends.
Investors are unsure whether AI will be everything they imagine it to be. However, tech doesn’t need that to continue working. Rauscher suggests avoiding overweighting banks and energy as inflation is sticky and the Fed may continue to raise interest rates. Nonetheless, tech should be fine.