Global markets have started the year with significant optimism surrounding artificial intelligence, driving bullish sentiment across equity, bond, private, and public markets. Major investment banks, including JP Morgan, are particularly optimistic about the potential for substantial gains, especially in US equities. JP Morgan anticipates that the Federal Reserve’s rate cuts could propel the S&P 500 above 8000 points, representing a gain of over 17 per cent.
Even without rate cuts, the firm projects the S&P 500 could reach 7500 points, a 10 per cent increase, supported by strong earnings per share growth for S&P 500 companies. This bullish outlook is shared by other Wall Street firms like Morgan Stanley and Citi, contributing to a general expectation of increased wealth for investors. However, some Australian fund managers believe that being fully invested in quality growth businesses is the best strategy in a bull market, as these cycles typically last between seven and ten years.
While the focus remains on the US, the influence of AI is undeniable. Citi estimates that around 40 per cent of global equity market capitalization is influenced by AI trends, largely driven by major US tech companies. JP Morgan Asset Management highlights that just eight stocks account for a significant portion of developed world equity markets. Michael Cembalest of JP Morgan Asset Management points to risks, including US power generation, China’s technological capabilities, and ultimately, whether the $US1.3 trillion investment in AI proves worthwhile.
Despite the overall bullish sentiment, concerns persist regarding market concentration and the potential for a correction if the AI narrative falters. The extent to which AI companies are dominating the S&P 500, and the S&P 500’s influence on global equity markets, create an environment where caution is warranted. AustralianSuper, one of Australia’s largest superannuation funds, grapples with decisions about how much to allocate to these dominant tech companies, showing the pervasiveness of the trend in global markets.
