Stocks continue to ride the AI boost

Another decent week for stock markets despite the central banks of Europe and the US  remaining hawkish in their outlook for interest rates. The Fed may not have moved interest rates this time. They did not rule out further rises in the coming months. The S&P 500 sold off towards the end of Friday but still managed to have its best week for months, and its 5th weekly gain, the Nasdaq its 8th. The sectors that had the best week were all those that one expects to do well in bull markets. The most economically exposed materials, energy, industrials and consumer discretionary. Tech stocks continue to benefit from the optimism around AI but are heading into euphoria territory, at least in the short term. The US dollar basket finished lower on the week, and yields on US treasuries rose on the week at the longer end as the curve is becoming less inverted. Merrill Lynch’s weekly flow show suggests to them the pain trade remains up.

Why this optimism? After all, the economic outlook remains mixed at best. The Fed did remain hawkish but, at the same, provided a slightly more robust forecast for the US economy, which may be the reason they believe the economy could take another rate rise as they tackle inflation. The latest US consumer data indicates US citizens are not finished spending their Covid cash. Consumer sentiment in June jumped 8%, reaching its highest level for four months. The latest retail sales data came in ahead of expectations. One tick for the bulls. Second, China is starting to stimulate its economy to try and achieve the 5% year-on-year economic growth it is committed to, another tick. The other is the growing belief that the fourth revolution may have wider benefits for the global economy. We wrote weeks ago that from the industrial revolution to electricity to the internet, each revolution had stimulated growth, created greed and eventually over-exuberance.

One leading research house this week is starting to reassess its expectations for stock indexes in the coming year based on a re-evaluation the performance AI-related stocks will have on the broader index and the new technology on the broader economy. There will be others; fund managers will panic greed will take over fear.

Looking to the week, stocks paused for breath on Friday, and it may be time for a longer pause. Jerome Powell’s testimony before Congress will be a big focus. He will most likely sing from last week’s song sheet. We also get flash Purchasing Manager Surveys from around the globe. The focus turns away from the Fed and the ECB and onto the Bank of England’s monetary policy committee and the much-targeted Andrew Bailey. Ahead of the meeting, we get the monthly inflation data. The headline year-on-year rate is expected to fall further to 8.4% from 8.7%. The MPC is expected to raise interest rates by 25 basis points to 4.75%. At the end of the week, we get May’s retail sales, forecast to fall by 0.3% month over month.