Investors’ zeal for AI powers stock markets highs
Global stock markets closed at record highs on Friday, powered by investors’ continued enthusiasm for artificial intelligence (AI). Many stocks have been rallying on the hope that AI enthusiasm will lead to higher future earnings. This year’s dramatic ascent of tech stocks riding the wave of AI enthusiasm has sparked debate over whether the AI boom may be approaching “bubble” territory. We are in a period where with AI there is a lot of excitement and we have probably got some time before we really have to see it proven. There is going to be a period eventually where the companies that are spending on AI need to realise some return on investment.
In the US, both the S&P 500 and the tech-dominated Nasdaq set records, with the Nasdaq passing its last peak in 2021, driven higher by gains for Facebook owner Meta and Nvidia, the leading AI chipmaker. Nvidia closed above $2tn (about M36 trillion) in market value for the first time. Nvidia’s market value has doubled in nine months. Nvidia’s latest earnings report, coupled with broader enthusiasm about the potential of AI technology, have helped to fuel a wider rally across global stock markets. The chipmaker has singlehandedly driven more than a quarter of the year to date (YTD) in the S&P 500, directly lifting the index by 96 points even before considering the broader effect it has had on investor sentiment.
US stocks rose on Friday, with the S&P 500 and Nasdaq Composite closing at fresh record highs, as tech stocks rallied on continued enthusiasm for artificial intelligence-related names including Nvidia, NetApp and Advanced Micro Devices. Declining Treasury yields also provided a boost, as disappointing factory data and a decline in consumer sentiment solidified expectations for interest rate cuts from the Federal Reserve by the end of the next quarter. Because the economy is doing well and because inflation remains a bit sticky, the Fed will likely be slower to lower interest rates.
US Markets have also drawn support from a resilient economy, as investors have tried to gauge the timing of the first interest rate cut by the Federal Reserve, with investors currently targeting June and nurturing expectations the central bank can engineer a soft landing for the economy.
Market participants slightly increased their rate cut expectations following the economic data. The odds of a 25 basis point rate cut at the Fed’s May meeting is now at nearly 26 percent, compared to 18 percent the previous day. Stocks gained even as troubled New York Community Bancorp plunged 25 percent after disclosing material weaknesses in internal controls related to its loan review, potentially a sign of a wider real estate shakeout ahead.
For the week, the Nasdaq jumped 1.7 percent and the S&P advanced 0.9 percent, with both indexes notching their seventh positive week out of the past eight; the Dow Jones index lagged with a 0.1 percent weekly loss. Including the Dow Jones index, all three major indexes notched their fourth straight month of gains in a rally largely fuelled by growth prospects related to AI.
Last week, the S&P 500 gained 41.16 points, or 0.81 percent, to end at 5,137.43 points, while the Nasdaq Composite gained 183.02 points, or 1.14 percent, to 16,272.22. The Dow Jones Industrial Average rose 90.43 points, or 0.24 percent, to 39,088.11. Stocks are expensive, they’ve gone up a lot in a very short time and investors are excited. Not surprisingly, talk of bubbles is widespread. But many of the usual accompaniments to a bubble are missing.
The case for stocks being frothy isn’t hard to make. The Nasdaq hit a new high last week, having risen 54 percent since the start of last year, while the S&P 500 is up 32 percent and Nvidia’s gains are so big they’re better expressed as the $1.5 trillion it has risen in value than as the hard-to-grasp 441 percent. In a single day last month, it rose in value by $276 billion, about the value of Chevron, the 26th-largest member of the index. This isn’t normal behaviour.
But is it a bubble? There’s no single definition of a market bubble, but for me it has to involve a speculative mania. It’s when buyers en-masse cross the line from assessing future profit potential to buying something they know is unreasonably expensive—or just don’t care about the price at all—because they think a greater fool will buy it off them at an even higher price.
This seems to be missing. The AI frenzy has hit the tipping point with surging demand across companies, industries and nations. Nvidia’s chips are the most important tools to AI and they are monetising it. Unlike the 1990s rally the current rally, is based by fundamentals underpinning those imaginations and that excitement. This time around there is sizzle but there is also steak.
In Asia, Japan’s Nikkei 225 closed above the 40, 000 mark and setting a new record in process after Wall Street hit fresh all-time highs on Friday. The index ended the last session of the week 0.5 percent higher at 40, 109.23, while the broader Topix fell 0.12 percent, retreating from its all-time high hit in the previous session. In China the CSI 300 closed 0.1 percent higher at 3, 540.87, with investors focused on China’s ‘’Two Sessions’’ meetings. Hong Kong’s Hang Seng index fell 0.23 percent.
The JSE FTSE All Share Index (ALSI) ‘s weakened, weighed down by a lacklustre earnings report from Sasol and cautious trade as markets awaited the release of the much-anticipated US PCE inflation data. Financial stocks led the losses, down by 0.7 percent, followed by industrials, which sank by 0.49 percent.
Commodities and Currencies
In commodity markets, the Brent crude oil price edged slightly lower after the Energy Information Administration reported a larger-than-expected increase in US crude stockpiles. However, losses were offset by confirmations by OPEC to extend supply cuts at their March meeting as well as by the ongoing tensions in the Middle East. Precious metal prices were mixed, with gold slightly firmer on a relatively weaker US dollar.
The US dollar initially weakened against its peer economies following the softer PCE inflation data. However, the greenback strengthened later in the day. Losses in the yen were offset by reports that a Bank of Japan board member hinted at the need to exit the ultra-loose monetary policy.
The rand gained some ground after being battered in the previous week. The local unit was bolstered after private consumption expenditure (PCE) price index data, the US Federal Reserve’s (Fed) preferred measure of inflation, was in line with market expectations. The softer PCE inflation data eased the concerns that surrounded price pressures following a higher-thanexpected CPI reading for January, thus fuelling hopes for a June interest rate cut.
Bitcoin has been on a tear this year, prompting questions about what kind of crypto exposure should be pursued as an investment strategy. There had been some debate over the past few seasons, but pretty much everyone can now agree that the crypto winter is finally over. Bitcoin (BTC-USD), along with other major cryptocurrencies, have all seen a big recovery since the end of October, coming out of a deep freeze that took place over much of the past two years. Things have not only defrosted, but have heated up the engines in recent weeks as splashy headlines and new developments prompt the industry to shout, “Back to the moon!”
Bitcoin is up nearly 30 percent over the past week and more than 150 percent over the past six months. It’s currently trading at $65,000, as the crypto closes in on its all-time high of around $69,000 set in November 2021. The strong advance comes along with strong risk-on sentiment in the broader market, though there are multiple drivers specific to the industry that have also sparked a rally in crypto stocks.
First and fore-most among the catalysts has been the launch of spot Bitcoin ETFs and the subsequent cash inflows from institutional investors and the retail crowd. The launches have helped cement crypto as an established asset class, giving an avenue to those waiting to use a mainstream vehicle to hedge and diversify, or invest in the sector. It’s also created robust demand for those hunting for digital gold, helping push the price of Bitcoin (BTC-USD) higher and higher.
On the supply side: Bitcoin is scheduled to undergo its fourth halving in April, one of the most anticipated events of 2024 within the crypto space. Halving is a process where Bitcoin mining is cut in half, reducing the number of new bitcoins released to the market. It was introduced to ensure BTC remains scarce. Investors have often targeted the period before the next Bitcoin halving to acquire more bitcoins in anticipation of a post-halving rally.
This week, markets attention will remain focused on inflation, interest rates and US jobs report. Cryptocurrency markets could be active again as buzz continues to build over the bitcoin halving event.
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