Stock market crash won’t stop AI-fueled bubble, economist says
The stock market has suffered a brutal bloodbath Last week, as recession fears mounted, Capital Economics predicts the boom in artificial intelligence will continue to drive this trend.
How surprising Weak July Jobs Report on Friday and a sharp decline in the Institute for Supply Management’s manufacturing index on Thursday sent stocks tumbling. For the week, the S&P 500 lost 2.5%, Nasdaq fell 3.6% and the Russell 2000, which had surged as it rotated into small-cap stocks, fell nearly 7%.
Meanwhile, concerns about economic growth have raised expectations of a more aggressive easing cycle from the Federal Reserve, with Wall Street finally sees a sharp drop in interest rates increase of 200 basis points or more.
In one note on fridayCapital Economics senior markets economist Diana Iovanel said the rally in stocks is set to continue.
“Renewed concerns about a US recession have increased the likelihood of further Fed rate cuts,” she wrote. “But we don’t think the US economy will hamper equity gains for much longer.”
She added that equity valuations do not suggest an “economic catastrophe” and credit spreads remain near record lows. Capital Economics predicts the Fed will cut interest rates at each meeting from September through July next year.
Iovanel said a recession was unlikely and growth would even pick up again after a slowdown in the second half of this year.
“As such, we do not expect risk sentiment to deteriorate much further,” she said. “As a result, we doubt the economy will be so preoccupied with the AI-fueled bubble that it will soon accelerate again.”
Indeed, recently Earnings reports from Microsoft, Meta and Google said they spent a total of $40.5 billion on infrastructure, land, and chips that power their AI services in the second quarter. And each company indicated that those numbers will only increase next year.
Such spending will likely end up at AI chip suppliers like NvidiaThe company has seen a significant increase in revenue and stock price over the past few years.
Others on Wall Street have urged investors not to overreact to the sudden decline in jobs. Claudia Sahm, a former Fed economist who developed the “Sahm Rule” recession indicator, said Luck that friday She doesn’t care that the United States is in a recession at the moment.indicates that household incomes are still rising while consumer spending and business investment remain steady.
However, Sahm, now chief economist at investment firm New Century Advisors, said recent trends in the labor market appear weak.
“This is very accurate over time, so we shouldn’t ignore that,” she added, noting that “recessions can come slowly, and then come quickly.”
