The stock market suffered a brutal bloodbath last week amid growing recession fears, but Capital Economics predicted that the substitute intelligence boom would proceed the upward trend.
The surprisingly weak July jobs report on Friday and the sharp decline within the Institute for Supply Management’s manufacturing index on Thursday sent stock prices lower. For the week, the S&P 500 lost 2.5 percent, the Nasdaq fell 3.6 percent and the Russell 2000, which had previously risen sharply on a shift into small caps, plunged nearly 7 percent.
Meanwhile, concerns about economic growth have raised expectations for a more aggressive easing cycle from the Federal Reserve, with Wall Street expecting rates of interest to fall by 200 basis points or more.
In a Note on FridayDiana Iovanel, senior market economist at Capital Economics, said the value increase is more likely to proceed.
“Renewed fears of a U.S. recession have increased the likelihood of further Fed rate cuts,” she wrote. “But we don’t think the U.S. economy will stand in the way of a stock rally for much longer.”
Equity valuations are removed from pointing to an “economic catastrophe” and credit spreads are still near record lows, she added. Capital Economics expects the Fed to chop rates of interest at every meeting from September to July next 12 months.
Iovanel said a recession was unlikely and growth would even speed up again after a period of weakness within the second half of the 12 months.
“We therefore do not expect risk sentiment to deteriorate much further,” she said. “The bottom line is that we doubt the economy will stand in the way of the AI-driven bubble reviving any time soon.”
In fact, recent earnings reports from Microsoft, Meta and Google show that they spent a combined $40.5 billion within the second quarter on the infrastructure, land and chips that power their AI services. And each company said those numbers will only get higher next 12 months.
Such spending will likely find yourself with AI chip vendors like Nvidia, which has seen astronomical increases in revenue and stock price lately.
Others on Wall Street urged investors to not overreact if there may be a sudden drop in jobs. Claudia Sahm, a former Fed economist who developed the Sahm Rule recession indicator, said: Assets on Friday that she was not currently concerned that the United States was in a recession. She identified that household incomes were still growing, while consumer spending and business investment remained stable.
Still, recent labor market trends have looked weak at best, says Sahm, who now works as chief economist at investment firm New Century Advisors.
“The numbers have been very accurate over time and should therefore not be ignored,” she added, noting that “recessions can build slowly and then come quickly.”
