Stock market outlook: powered by AI, but avoid the bump ahead

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NVIDIA's (NVDA)'s recent earnings report was one of the market's most important events — and not just because the chipmaker is the third most valuable company in the S&P 500.SPX) – but because of its artificial intelligence (AI) market leadership. The company has about 90% market share for AI chips, making it the chip design monopoly, at least for now (and probably, for many more years). This fact makes NVIDIA a bellwether not only for AI, but for the stock market as a whole.

The AI ​​era is now.

Because the current stock market rally is focused on disruptive technology, of which NVIDIA is a symbol, it is widely accepted that the broader market's further trend hinges on the direction of the AI ​​poster child. Now, NVIDIA has provided more than enough evidence that the AI-driven rally can continue its run. The AI ​​darling has shown growing demand for its products – with supply expected to continue well into next year – and confirmed that spending on AI hardware is accelerating.

NVIDIA stock rose after posting exceptional results and outlook, while the rest of the market fell. Fears of persistently sticky inflation dragged down the market, as investors fretted that the Fed could keep rates on hold for longer or even raise them.

Of course, a single company's news, no matter how spectacular, cannot have more impact on the sentiment of ordinary investors than the economy and the central bank. However, NVIDIA's findings and approach once again highlighted the fact that we now live in the AI ​​era, with long-term effects that span economies, markets and society as a whole.

Prices can stay high, never mind AI.

In particular, while hyperscalers such as Microsoft (MSFTthe alphabet (Google), and Amazon (AMZN) are responsible for about half of the chipmaker's total revenue, NVIDIA CEO Jensen Huang confirmed that AI isn't just reserved for big-cap cloud providers. According to Huang, “Generative AI has expanded to consumer Internet companies, and enterprise, autonomous AI, automotive and healthcare customers, creating multi-billion dollar vertical markets.”

That means the AI ​​capital spending cycle is just getting started, marking the “beginning of a new industrial revolution,” according to Huang. Lingering concerns that the tech rally is too hot, and that hardware spending plans may undercut expectations, can now be put to rest. Sustained AI Capex momentum, reflected in NVIDIA's rising data center revenue, suggests the revolutionary technology's development could drive the stock further, regardless of whether the Federal Reserve's interest rates stay low or high.

That's because the world is going through a technological revolution – one that could be even more life-changing than the invention of the Internet. As such, it has already begun to disrupt existing industries, while creating entirely new ones. For example, NVIDIA said it sees a huge, potentially multibillion-dollar opportunity in autonomous AI – an area that didn't exist at all until two years ago but is growing rapidly because Countries invest in developing national AI capabilities.

According to Goldman Sachs research, investment in AI hardware alone will account for 1 percent of U.S. GDP this year and next, rising to 2-2.5 percent of GDP by 2032. This prediction, made only a month ago, may turn out to be too conservative. Via NVIDIA's sales and orders data. Hardware (CPUs, servers, etc.) is critical to the integration of technology into business processes throughout the economy, starting with hyperscalers and reaching all economic industries.

Signs of Life Beyond the Big Five

NVIDIA's report was “a grand finale” to the first-quarter earnings season, with stronger-than-expected revenue — and more importantly, a strong guidance upgrade — supporting the market amid expectations of a rate cut. she does. Technology firms beat market and analyst expectations for another quarter, posting more positive guidance updates than any other sector.

In the tech realm, megacaps are brighter than ever. Ahead of NVIDIA's results, five “fantastic” stocks — NVIDIA, Alphabet, Amazon, Meta (Meta), and Microsoft – which was estimated to post 64% EPS growth, is now expected to increase as NVDA beat all expectations. While earnings growth excluding tech megacaps was still negative, the last three quarters showed a clear trend of improvement. Analysts now expect the “other 495” companies to start showing significant positive EPS growth from the next reporting season.

Expanding earnings growth could help extend the rally, which has already been evident this year as stocks in various sectors moved above their multi-month highs. As concerns about market concentration ease, investors are more likely to pour money into stocks outside of tech megacaps, creating a positive cycle.

Stock Market Direction: Bears vs Statistics

Amidst high interest rates, the approaching earnings season, and the economy's apparent resilience in the face of a stock market rally under the AI ​​banner, most of Wall Street's bears have officially capitulated. The last shoe to drop was a key price target upgrade from Morgan Stanley strategist Michael Wilson, who had previously predicted the S&P 500 would fall 15% by the end of the year.

Now, the last bear standing is JPMorgan, whose strategists predict a 20% drop in the broad market index by the end of the year. He says markets tend to overestimate earnings growth for S&P 500 companies in the second half of the year, as softer economic growth is expected to expand earnings. In addition, JPMorgan cited sticky inflation, “prolonged high” interest rates, and strong stock prices as reasons for its bearish outlook.

However, according to Wilson, high data volatility is expected to continue, making it difficult for analysts to predict economic outcomes and thereby muddling the stock market outlook. With no clear indicators at hand, many market participants are turning to historical data for clues.

Various statistics seem to support an optimistic outlook for the rest of the year. May 23rd Marked 100.Th 2024 trading day, and the S&P 500 was up by double digits. Historical data shows that when the index has gained 10%+ in that period, it has ended the rest of the year higher on 85% of the occasions. The 11% increase is also the best 100-day result for a presidential election year since 1928.

Quality will win.

However, all this AI optimism doesn't mean the stock will keep going up in a straight line forever. We will certainly see a bear market at some point in the future, as well as many corrections of varying magnitudes. A downturn is a healthy part of the cycle, allowing the market to deflate and stock prices to come back to reality.

However, as futurist Roy Amra puts it, “We overestimate the impact of a technology in the short term and underestimate the impact in the long term.“It may be that skyrocketing stock prices represent this short-term overestimation of AI, but the fact that it will have a profound impact on the global economy and stock markets is not up for debate. .

How it will all play out is still unclear: As with all disruptive, sweeping changes, there will be plenty of loss and failure, as with NVIDIA-style success stories. While it's difficult to predict with any certainty which stock markets will rule the roost several years from now, it's logical to assume that fundamentally sound, well-managed companies with strong business models will be revolutionized by tech. will perform better in using it to their advantage. their weaker companions.

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