As stocks hover near record levels and the S&P 500 experiences its best month since November 2020, Wall Street is focusing on earnings, particularly within the artificial intelligence (AI) sector, as a significant factor in potential market advancements. Andrew Graham of Jackson Square Capital remarked, “It’s a boom,” highlighting the challenging conditions for market downturns when double-digit earnings growth, projected at 15.1% for the first quarter, is on the horizon.
The latest financial reports are fostering optimism; as of late April, 84% of companies that announced earnings have delivered positive surprises, as indicated by FactSet data. Veteran strategist Ed Yardeni noted in a recent client communication, “We are still riding the rails on the Roaring 2020s Express. Nothing seems to stop or derail this train.”
A surge in corporate investments in AI by tech giants such as Microsoft, Amazon, Meta Platforms, and Alphabet is fueling growth across various sectors of the AI market. Even equipment manufacturer Caterpillar saw its stock reach record highs last week, driven by burgeoning sales of its power and energy engines and industrial turbines designed for data centers.
This surge in spending is also reflected in economic indicators. According to data from the U.S. Bureau of Economic Analysis, business investments in the first quarter played a crucial role in driving real GDP growth, contributing more to the 2% expansion than consumer spending, which is typically seen as the backbone of economic momentum. In the context of oil prices soaring above $100 and ongoing geopolitical tensions in the Strait of Hormuz, AI investments appear to be a critical stabilizing force for the economy. Mark Zandi, chief economist at Moody’s Analytics, remarked, “I think we’d be likely in a recession already if not for the AI investment-driven boom,” while also noting that businesses are capitalizing on tax incentives for such investments.
However, stock market reactions among major tech companies have been mixed as investors assess robust earnings alongside mounting expenses. Notably, Meta Platforms, along with Microsoft and Apple, has highlighted increased costs for memory chips essential for operation in data centers and laptops. Tom Essaye, founder of Sevens Report Research, cautioned, “Memory that everyone needs in the technology space is now skyrocketing in price. How long can companies negotiate this? They’ve been doing an amazing job. The answer is not forever, so we can’t get complacent.”
UBS analysts remain bullish on stocks for the remainder of the year, maintaining a target of 7,500 for the S&P 500 by the end of 2026, though they have adjusted this down from a previous 7,600 target due to increased energy costs. While strategists acknowledge potential in the AI sector, they recommend that investors diversify their portfolios beyond just the major tech names. Ulrike Hoffmann-Burchardi, global head of equities at UBS Wealth Management, emphasized a balanced approach to AI investments, advocating for exposure across various layers such as enabling technologies, intelligence, applications, semiconductors, chip-making equipment, and infrastructure.
Even the previously underperforming iShares Expanded Tech-Software Sector ETF has seen recovery, rebounding about 5% in April and earning recognition from Fundstrat as a top sector choice. Tom Lee expressed nuanced optimism regarding this sector, suggesting, “AI is a threat to many business models, and the software sector will need to evolve—but the best software companies will dynamically adjust and arguably leverage AI.” He added that while a V-shaped recovery for software stocks is not anticipated, the current environment appears favorable for future growth.
