Chip stocks have taken it on the chin lately, but worries about the AI trade don't have to bring down the entire market.
The S&P 500's information technology and communications sectors fell 15% from June 1 through July 29, when the Federal Reserve announced it was holding the fed-funds rate steady, strategist Jim Paulsen wrote Monday on Substack.
But the benchmark index's other nine sectors were up 4%, which helped soften the blow to the IT and comm stocks and the index itself. The overall S&P 500 ended up down less than 4%.
Breadth is healthy. The index's much smaller loss proves it. So does a nearly 3% gain in the Invesco S&P 500 Equal Weight ETF.
Volatility in the AI trade isn't tanking the market. Paulsen thinks that is a story line that will keep playing out.
For Paulsen, it's the "New Era" tech and comm vs. the "Old Era" sectors -- financials, materials, real estate, healthcare, utilities, energy, industrials, consumer staples, and consumer discretionary.
"It's possible -- unlike during the dot-com era -- that the stock market could suffer a New Era bear market without the S&P 500 experiencing even a correction," wrote the strategist, now retired after being chief investment strategist at Wells Fargo's institutional investment unit and the Leuthold Group.
Nationwide's Mark Hackett pointed out that it's also important that many tech leaders, particularly the AI hyperscalers, aren't moving in lockstep. Microsoft and Amazon, for example, surged after their latest earnings reports. Alphabet, Meta Platforms and Apple tumbled.
"The growth trade and the Magnificent 7 are no longer trading as a monolith," Hackett, the insurance company's chief market strategist, wrote Monday.
Morgan Stanley's Lisa Shalett added another layer.
Investors have stopped accepting the notion that all AI plays will pan out, which is important with long-term bond yields going higher and companies on the hunt for outside money to finance more AI spending.
"As financial conditions have tightened, investors are finally demanding some risk premium. We consider that rational and healthy, leaving us confident that the U.S. bull market will continue," wrote Shalett, who is the chief investment officer of the bank's wealth management unit.
"Demand for clarity on AI-capex return on investment will likely instill strategic discipline," she added.
So pull all these threads together and what's the story's next chapter?
Stocks should be able to keep climbing despite the AI skepticism. Profit growth is picking up outside of Big Tech: Per-share earnings for the equal-weighted S&P 500 are expected to rise nearly 18% this year, according to FactSet.
This is how Ivan Feinseth of Tigress Financial Intelligence put it:
"The economic expansion and corporate earnings cycle remain fundamentally constructive despite elevated macro and geopolitical uncertainty," wrote Feinseth, Tigress' chief market strategist.
Feinseth added that corporate fundamentals will stay strong and keep pushing up stocks. He backs himself up with his year-end target for the S&P 500 -- 8,050. That's more than 6% above where the index is now and nearly 18% higher than where it ended last year.
Of course, there are always risks to any market. The biggest one is the Iran war and its impact on oil prices.
Still, it's clear that earnings matter more. They're the protagonist. And they're lookin' good.
Comments