Despite the stock crash, the AI-fueled bubble will soon regain momentum, economist says
Last week, the stock market experienced a significant downturn, triggering widespread concerns among investors and analysts. This sudden decline has raised fears of a potential recession, causing a ripple effect across various sectors. However, despite these alarming signs, experts at Capital Economics maintain an optimistic outlook, particularly for the artificial intelligence (AI) industry. They argue that the AI sector’s growth trajectory remains robust and will continue to drive market recovery in the near future. This perspective offers a counter-narrative to the prevailing sentiment of doom and gloom, suggesting that the current downturn may be temporary.
Recession fears have become more prevalent, but Capital Economics predicts that the AI industry will continue to thrive. The Federal Reserve’s response to economic growth concerns could play a pivotal role in shaping market dynamics. As the Fed contemplates a more aggressive easing cycle, Wall Street analysts are forecasting a potential drop in interest rates by 200 basis points or more. This anticipated monetary policy shift is seen as a catalyst for renewed market optimism, particularly in sectors heavily invested in AI technologies. Senior Markets Economist Diana Iovanel from Capital Economics has been vocal about this outlook, asserting that the likelihood of additional rate cuts from the Fed has increased significantly.
Despite the weakening US economy, Iovanel does not believe that it will hinder the stock market for long. According to her analysis, current stock valuations do not indicate an imminent economic collapse. She points out that credit spreads remain low, which is a positive indicator for the stock market’s resilience. Capital Economics forecasts that the Federal Reserve will lower rates at each meeting from September to July of the following year. This sustained easing cycle is expected to provide a much-needed boost to market sentiment, potentially offsetting the negative impacts of recent economic indicators.
Interestingly, Iovanel does not anticipate a recession and expects economic growth to rebound in the second half of the year. She also believes that risk sentiment will not deteriorate significantly, which bodes well for the stock market. The AI industry, in particular, is expected to continue its upward trajectory. Recent earnings reports from major companies like Microsoft, Meta, and Google underscore this trend. These tech giants collectively spent a staggering $40.5 billion on AI infrastructure, land, and chips in the second quarter alone. This massive investment is a testament to the industry’s growth potential and its critical role in driving future market gains.
This spending spree will undoubtedly benefit companies like Nvidia, which has already seen significant growth in both revenue and stock price. Some on Wall Street advise against overreacting to recent weaknesses in the labor market. Former Fed economist Claudia Sahm, who developed a widely-recognized recession indicator, does not currently believe that the US is in a recession. She notes that household income is still growing, and consumer spending and business investment remain strong. However, she acknowledges that recent trends in the labor market have been concerning, which warrants close monitoring in the coming months.
Sahm warns that recessions can develop slowly and then suddenly materialize, urging investors not to ignore warning signs. Despite these cautionary notes, the general consensus among economists is that the AI-fueled bubble will regain momentum. The stock market may rally as fears of a recession and potential rate cuts persist. However, the current state of the economy and the labor market does raise some concerns for the future. Investors are advised to stay vigilant and consider diversifying their portfolios to manage risks effectively.
The tech sector has performed strongly in recent rallies, with stock prices of companies such as Nvidia and Meta rising significantly. This rally follows a period of caution from investors about the profitability of companies investing heavily in AI. This caution contributed to a decrease in the S&P 500 index. Nvidia’s stock price increase was due to news of increased capital investment in AI from other large tech companies. For instance, Microsoft announced a capital expenditure of $19 billion on AI in the second quarter, marking an 80% increase from the same period last year. Analysts subsequently raised their spending estimates following Microsoft’s announcement, further fueling market optimism.
Meta’s second-quarter results exceeded expectations, causing investor confidence to surge. The company also expects to see high revenues in the third quarter, surpassing previous predictions. In addition to positive corporate results, investors were encouraged by a more dovish approach from the Federal Reserve after their latest policy meeting. Fed Chair Jerome Powell suggested that a reduction in policy rates could happen as soon as the next meeting in September. Recent data has added to the confidence that inflation is returning to the 2% target set by the central bank. The committee’s focus on the labor market in their statement may suggest increased sensitivity to the risk of the job market cooling excessively.
When it comes to investing, it is crucial for investors to stick to their long-term plans in times of volatility to avoid missing out on rebounds. Market sentiment and positioning had become stretched earlier in the month, making a pullback more likely. However, market fundamentals remain positive, and it is expected that the S&P 500 will recover and end the year higher than its current level. In this context, it is advised that investors consider various strategies, including diversifying their portfolios to manage risk. Additionally, investors could consider investing in different sectors and industries to take advantage of potential opportunities.
It is important for investors to have a long-term perspective and not get swept up in short-term market fluctuations. Despite some uncertainties, there are still many potential opportunities for investors in the current market. The AI industry, in particular, continues to show promise, with significant investments from major tech companies driving innovation and growth. This sector’s resilience and potential for high returns make it an attractive option for long-term investment strategies. As the market navigates through periods of volatility, maintaining a focus on long-term goals can help investors capitalize on emerging opportunities while mitigating risks.
The US stock market saw increases after the Federal Reserve announced they would not change rates in July. Federal Reserve Chair Jerome Powell suggested that a rate cut might happen in September. Ann Berry, the founder of Threadneedle Ventures, shared her thoughts on the Fed’s decision and its impact on the markets. Berry believes that the markets are interpreting the Fed’s comments as a high likelihood of a rate cut in September. She also notes that tech stocks have seen a boost in prices due to their sensitivity to interest rates. However, Berry is not convinced that the Fed will actually lower rates in September and thinks the market may react negatively if they don’t.
Berry believes that the recent political volatility has also played a role in the market’s ups and downs. Investors are considering the potential impact of the policies of the two leading presidential candidates. Berry suggests that there is concern about the trade issues surrounding AI, and if companies don’t show strong profits from AI, there could be a rocky fall in the markets. The US equities market includes the S&P 500, Dow Jones Industrial Average, and Nasdaq. The Fed’s decision to not change rates in July was based on current economic conditions and data. Powell’s comments about a potential rate cut in September may indicate the Fed’s willingness to adjust policy as needed.
Berry’s opinion is that the market is responding positively to the possibility of a rate cut in September. Tech stocks are particularly sensitive to interest rates because they often rely on borrowing money for growth. Berry acknowledges that her prediction may not be accurate and changes can happen leading up to September. She also points out that volatility in the markets can have different causes, such as political events. The current US political landscape is adding to the uncertainty in the markets. Berry believes that the successful implementation of AI and its impact on company profits will play a major role in the market’s performance. Overall, the article provides insight into the Fed’s decision, market trends, and potential factors that could affect the markets in the future.