David Kostin, Chief US equity strategist at Goldman Sachs Research, discusses the sustainability of the US stock market rally, including the dominance of AI companies, Nvidia's underperformance, market valuations, interest rates, election uncertainties, investor positioning, demand for US stocks, and the transition from active to passive funds.
Investments in AI by leading companies are driving market growth through increased earnings and share prices.
Concerns about sustainability and high valuations in the market, especially with the focus on AI-centric companies.
Deep dives
AI Investments Driving Market Performance
Investments in AI by companies such as Nvidia, Amazon, Microsoft, Google, and Meta have been significant drivers of market performance, with these companies increasing earnings by 84% compared to the rest of the market's 5% rise. Their focus on CapEx and R&D, accounting for 22% of all such investments nationally, has led to share price increases and overall market growth.
Earnings and Valuation Concerns
Although the market has seen positive earnings from leading AI-centric companies, concerns arise regarding the sustainability of such growth and high valuations. Valuations for the S&P 500 are at historic highs, with interest rates playing a significant role in market multiples. Earnings estimates for AI-focused companies have surged, contrasting sharply with reductions for other market sectors, contributing to the overall market performance.
Market Outlook and Risks
Despite an optimistic market outlook and a slight increase in the S&P 500 year-end forecast, potential risks loom ahead. The AI sector remains a critical area of focus, with uncertainties surrounding the economic benefits of AI investments posing valuation risks. Additionally, questions arise about market positioning, with actively managed mutual funds underweight in large tech stocks, potentially impacting market dynamics.
Can US stocks sustain their rally from here? Goldman Sachs Research’s David Kostin, chief US equity strategist, shares his outlook for equities for the second half of the year and the risks that could derail that rally.