As February bids farewell with an unusually prolonged stay, Wednesday emerges as the bearer of potentially historic market returns, echoing levels not seen since 1998. The latest release of the Federal Reserve’s preferred inflation gauge arrived sans surprises, fostering a palpable sense of relief among investors.
Today, our attention is drawn to unanticipated scenarios, as elucidated by UBS’s global equities strategist, Andrew Garthwaite, and his team, who present a compendium of unforeseen possibilities that may have eluded investors’ radar.
Chief among these projections is a bold assertion: “Generative AI holds the promise of propelling productivity growth to 2.5%, consequently fueling a 20% upsurge in equities by 2024.” This sanguine forecast could potentially drive the S&P 500 index to a towering 5,723.87. (It merits acknowledgment that UBS’s baseline projection positions the S&P 500 at 5,400 by year-end.)
The analysts acknowledge the present impact of this burgeoning technology on both work output and quality, drawing parallels to the productivity surge witnessed during the information and communication technologies revolution. Investors, it seems, might be eagerly anticipating a similar boost from Generative AI.
Nevertheless, they issue a note of caution against overlooking historical timelines. UBS highlights that despite former Fed Chair Alan Greenspan signaling a rise in productivity as early as 1996, it wasn’t until February 2000 that the 5-year average of productivity surpassed 2.5%. By then, the Nasdaq had tripled in value.
Should the average productivity indeed reach 2.5%, in contrast to the 1.5% assumed by UBS economists and the Fed, this could imply lower-than-expected inflation and faster-than-anticipated rate cuts. Furthermore, an undershoot in inflation might categorize the economy as mid-cycle rather than late-cycle, with full employment estimated to be below the Fed’s projected 4.1%, potentially hovering around 2.5% to 3% unemployment.
Additionally, under these circumstances, a margin squeeze would likely diminish. However, analysts warn that a perceived shift in business models prompted by Generative AI introduces the risk of extreme valuations, akin to historical instances involving railways, the technology boom, and the media and telecom wave.
Two additional preconditions, namely central banks printing money and a substantial shift from the money market to equities driven by heavy retail stock buying, are not dismissed. The analysts advocate for a long position in equities, particularly in sectors poised to benefit from Generative AI, such as software and semiconductors, while also underscoring the importance of exercising caution amidst the possibility of market bubbles.
Initial market reactions indicate positive movements in stock futures and stable Treasury yields after the release of Personal Consumption Expenditures (PCE) data meeting expectations. The Bank of Japan hints at a potential reassessment of its loose monetary policy, resulting in a surge in the yen’s value. Meanwhile, Bitcoin remains below the $63,000 mark.
In other developments, headline PCE inflation and core measures align with expectations, although weekly jobless claims experience an uptick. Pending home sales data is slated for release at 10 a.m., alongside various scheduled speeches from Federal Reserve officials throughout the day.
Snowflake shares underwent a sharp 20% decline following disappointing financial results and the departure of its CEO, while HP experienced a slip in its stock value despite meeting estimates. AMC Entertainment reports a revenue beat attributed to successful collaborations with Taylor Swift and Beyoncé, yet faces a downturn in its stock price.
Viking Therapeutics issues new shares after encouraging data on a weight-loss drug, contributing to market activity, while WW International witnesses a significant 23% drop as Oprah Winfrey steps down from its board after her association with a weight-loss drug. Additionally, reports suggest that the Securities and Exchange Commission (SEC) is investigating whether OpenAI provided accurate information to investors.
In online discourse, “Best of the Web” features a personal narrative detailing a loss of $240,000 resulting from a cryptocurrency investment encouraged by an acquaintance on Instagram. Other highlights include efforts to preserve Italy’s renowned culinary dish and the U.S. Labor Department inadvertently confusing an email concerning consumer prices.
In the realm of retail investor sentiment, Nvidia emerges as a new focal point, although it falls short of the intense interest witnessed around Tesla in 2023, according to analysis by Vanda Research. A comparative chart illustrates the varying levels of retail investment activity in NVDA and TSLA stocks during the specified period.
