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Investors Can’t Miss the AI Rally: Morning Brief
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Wall Street strategists continue to chase the S&P 500 higher.
The most recently? Julian Emanuel of Evercore ISI, which now sees the index rise to 6,000 by the end of this year amid an AI revolution still in its “early stages”.
Emanuel expects profits to grow again this year and next, along with stock market history that suggests valuations could remain high for longer than investors expect, pushing the index up another 11% this year.
But target prices and the market’s path to achieving them – in Evercore’s bullish scenario, the S&P 500 could reach 7,000 by the end of next year; in a bearish scenario, we are back to 4,750 – they are less significant than the push this survey gives all clients: you should have an answer when asked about your AI strategy.
On the last year, AI was cited across the street as the most important catalyst pushing markets higher. This happened when the Federal Reserve late rate cutsinflation was slow to return to 2%and the US economy exceeded expectations.
And as this bull market continues, Emanuel expects volatility to increase as AI becomes an even bigger thematic driver for stocks.
“Convexity is a must-have in a technology-driven bull market that will become more volatile,” Emanuel wrote. As a result, his team recommends a “strangled” options position on the Nasdaq, purchasing calls and puts at prices above and below current prices, respectively.
However, the details of this negotiation are less important than the thrust of Emanuel’s reminder to clients.
Which is you must have AI trading.
Chairman and CEO of Nvidia Corporation, Jensen Huang, delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, Sunday, June 2, 2024. (AP Photo/Chiang Ying-ying) (ASSOCIATED PRESS)
Trading can be as simple as an options position that offers some positive reward and protection against losses. Elsewhere, the Emanuel team mentions “AI Revolutionaries” and “Small Cap Standouts” as other possible portfolio tilts for the current environment.
As always, portfolio managers will work within their mandate to make the best decisions for clients. What any strategist thinks about the direction of the S&P 500 over the next six months is just part of that calculation, now or at any other time.
What’s not practical, however, is getting out of the AI discussion – telling stakeholders that we’re not interested, or that we’re not prepared, or that we’re not ready to find a way to bring AI into our process. For investors and everyone else.
The story continues
When 2023 began, investors were bracing for recession and Wall Street was less than enthusiastic about the stock market’s prospects. O surprising consensus that froze among the investor class in late 2022 was that stocks would continue to fall into early 2023 as the economy contracts. In the second half of the year, investors expected the market to recover as the economy returned to growth.
Instead, the market rose from the start. AI has taken over the streets while profits, the lifeblood of long-term stock market returns, have remained stable.
Investors caught off guard in a rally fueled by the unexpected craze for chatbots, cloud storage and massive amounts of computing power had some leeway in explaining to clients why they didn’t predict the Nasdaq would gain 40%.
By June 2024, these excuses have run out.
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