Categories: Trending now

Stock market crash won’t stop AI-fueled bubble, economist says

2024-08-05 14:30:02

The stock market suffered a brutal bloodbath last week as recession concerns shot up, but Capital Economics predicted the artificial intelligence boom will continue to lead the way higher.

AD

The surprisingly weak July jobs report on Friday and the sharp deterioration in the Institute for Supply Management’s manufacturing index on Thursday sank stocks. For the week, the S&P 500 lost 2.5%, the Nasdaq fell 3.6%, and the Russell 2000, which previously soared on a rotation into small caps, tumbled nearly 7%.

Meanwhile, economic growth concerns have raised expectations for more aggressive easing cycle from the Federal Reserve, with Wall Street seeing rates eventually plunging by 200 basis points or more.

In a note on Friday, Capital Economics senior markets economist Diana Iovanel said the stock rally should resume.

“Renewed fears of a US recession have increased the chances of additional rate cuts from the Fed,” she wrote. “But we don’t think that the US economy will stand in the way of an equity rally for much longer.”

Stock valuations are nowhere near indicating an “economic cataclysm,” and credit spreads are still close to record lows, she added. Capital Economics sees the Fed cutting rates at each meeting from September until next July.

Iovanel said a recession is unlikely and growth will even reaccelerate after a soft patch in the second half of this year.

“So we don’t expect risk sentiment to deteriorate much further,” she said. “The upshot is that we doubt the economy will stand much in the way of the AI-fueled bubble picking up steam again soon.”

Indeed, recent earnings reports from Microsoft, Meta and Google indicate they spent a combined $40.5 billion on the infrastructure, land, and chips that power their AI services during the second quarter. And each company indicated that those numbers will only get bigger next year. 

Such spending will likely end up at AI chip suppliers like Nvidia, which has seen astronomical increases in revenue and its stock price in the last few years.

Others on Wall Street have called for investors not to overreact to the sudden weakening in jobs. Claudia Sahm, a former Fed economist who developed the “Sahm Rule” recession indicator, told Fortune on Friday that she’s not concerned right now that the U.S. is in a recession, pointing out that household income is still growing while consumer spending and business investment remain resilient.

Still, recent trends in the labor market have looked weak at best, said Sahm, who is now chief economist at investment firm New Century Advisors.

“It’s been very accurate over time, so that shouldn’t be dismissed,” she added, noting that “recessions can build slowly, and then come quickly.”

Recommended Newsletter: CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about–and from inside–the C-suite. Subscribe Now.
News Today

Recent Posts

Kareena Kapoor’s Next Untitled Film With Meghna Gulzar Gets Prithviraj Sukumaran On Board

Kareena Kapoor is working with Raazi director Meghna Gulzar for her next film. The project,…

17 hours ago

Purdue basketball freshman Daniel Jacobsen injured vs Northern Kentucky

2024-11-09 15:00:03 WEST LAFAYETTE -- Daniel Jacobsen's second game in Purdue basketball's starting lineup lasted…

17 hours ago

Rashida Jones honors dad Quincy Jones with heartfelt tribute: ‘He was love’

2024-11-09 14:50:03 Rashida Jones is remembering her late father, famed music producer Quincy Jones, in…

17 hours ago

Nosferatu Screening at Apollo Theatre Shows Student Interest in Experimental Cinema – The Oberlin Review

2024-11-09 14:40:03 A silent German expressionist film about vampires accompanied by Radiohead’s music — what…

17 hours ago

What Are Adaptogens? Find Out How These 3 Herbs May Help You Tackle Stress Head-On

Let's face it - life can be downright stressful! With everything moving at breakneck speed,…

18 hours ago

The new Mac Mini takes a small step towards upgradeable storage

Apple’s redesigned Mac Mini M4 has ditched the previous M2 machine’s SSD that was soldered…

18 hours ago