It’s tempting to think that the scorching rally that sent stocks to all-time highs this past week was based entirely on hype about artificial intelligence. Don’t believe it.
The rally may have been sparked by
Nvidia’s
blowout earnings on Wednesday, but it spread well beyond the AI behemoth. Three sectors hit new highs this past week—tech, healthcare, and industrials. Financials and materials are less than 5% away from their peaks.
Costco Wholesale,
which sells more corn chips than microchips, is at a record too.
The
S&P 500 index
was trading at 5100 on Friday, up 2% on the week and 7% on the year.
“The big concern has been that it’s only seven stocks that are making new highs,” said Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report. “None of the internals in the market actually confirm that.”
What’s even more remarkable is that this stock market rally has persisted despite the fact that its original justification has fallen apart. Most of the market’s 25% gain since late October was premised on the idea that the Federal Reserve would cut interest rates starting in March—or May at the very latest. Recent comments from members of the Fed, along with signs of persistent inflation, suggest that the first cut could come in June or even later. Hopes for as many as seven rate cuts this year have faded away.
“While most of those incremental [rate] cuts are now priced out, the stock market did not correct at all,” wrote J.P. Morgan strategist Marko Kolanovic this past week. “We find current markets developments odd,” he added, puzzling over how “various far-fetched applications of AI” will lift the broader economy.
He has a point. AI is probably not going to boost the larger economy in the near term. But other economic indicators have held up well, with or without AI. Home sales, for instance, are rebounding despite persistently high rates. And corporate earnings are holding up too. Of the companies that have reported earnings this quarter, 78% are beating analysts’ earnings estimates, according to Fundtstrat, a rate that’s better than the historical average.
Nvidia, the leading chip maker for AI applications, was the biggest story of the week. The stock soared 16% on Thursday after the company reported that its revenue had more than tripled in the fourth quarter and forecast that the first quarter of 2024 would bring more of the same. On Friday, its market value eclipsed $2 trillion.
The results lifted the stocks of other tech names that benefit from the rise of AI. But it may also be benefiting the broader market by drawing in new investors who had been sitting on the sidelines waiting for a new justification to buy. “The average investor sees the market going up, and thinks, ‘I need to put money to work,’ ” Tentarelli said.
There is evidence that retail investors are growing more bullish. Charles Schwab’s quarterly survey of active traders released on Thursday found the highest bullish sentiment since it launched in 2021, a reversal from a bearish reading in the fourth quarter.
While animal spirits may be pushing the market higher now, the direction of interest rates will determine whether the rally holds. “Will the market Top Out or Broaden Out?” wrote Sam Stovall, chief investment strategist at CFRA. “We think it will broaden out—eventually, but not before investors feel assured that the Fed will not postpone the first rate cut beyond the second quarter.”
Write to Avi Salzman at [email protected]
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