Investors may face a correction as quarterly earnings season begins, with stocks trading at record highs.
Morgan Stanley’s chief U.S. equity strategist warned that uncertainty around a range of different issues – including corporate earnings, the outcome of the November election, future tariffs and central bank policy – will mean the current third quarter will be tough for investors. Said it might become “unstable”.
“To me, the valuation looks very, very exciting,” Mike Wilson told Bloomberg Television on Monday. “I think there’s a good chance of a 10% correction sometime between now and the election.”
The Morgan Stanley strategist was quick to point out that, with the exception of a few dozen U.S. companies, corporate profits have not increased and won’t until the Fed starts to ease policy.
Investors will be hoping to glean some useful hints on the direction of monetary policy when Chairman Jay Powell testifies to Congress today and tomorrow. Currently, with labor market data softening, the market expects an 80% chance of an interest rate cut in September.
“We need to get rates down, that’s the No. 1 priority,” Wilson told Bloomberg TV. “Or we need some kind of exogenous positive shock on growth that doesn’t cause inflationary problems. You tell me where that comes from.
Taiwan AI chip suppliers’ exports to U.S. surge
This is where artificial intelligence, especially generative artificial intelligence, comes in.
Whether it’s Apple, Meta or Amazon, many companies are hitting new all-time highs on expectations that artificial intelligence will be transformative for corporate profits, boosting productivity without driving up prices.
The question is whether a slew of earnings data will bear that out when major Wall Street banks begin reporting results on Friday.
“I hope a lot of companies will give us some concrete examples in the second quarter of how artificial intelligence is starting to play a role in improving productivity and cutting costs,” Ed Yardeni, president of Yardeni Research, told CNBC on Monday.
Taiwan is a major supplier of cutting-edge electronics needed for artificial intelligence data centers, and its latest export data shows that with the help of companies such as TSMC, shipments to the United States surged 74% in June from a year earlier.
On Monday, the country’s industry-leading foundry that makes artificial intelligence chips on behalf of Nvidia even joined an elite club of mega-stocks worth $1 trillion or more, albeit briefly.
Faced with this momentum, Yardeni sees no reason for investors not to chase the market higher.
“The market has continued to move higher over the past few weeks, reaching record highs, and that’s on the back of disappointing economic indicators,” he said.
“I think investors have concluded that we don’t have to worry too much about an economic slowdown or even a recession because if that becomes a significant risk, the Fed will move very quickly to lower interest rates.”
The illusion of artificial intelligence could erode some predicted productivity gains
But artificial intelligence may not be the panacea everyone thinks it is.
James Ferguson, founding partner of British economic research company MacroStrategy Partnership, believes that investors have not considered the tendency of generative artificial intelligence hallucinationthat is, spitting out fictitious data and information, thus weakening productivity improvements.
Businesses that fail to take the time to carefully examine their work may find themselves in a similar predicament as the law firm of Levidow, Levidow & Oberman.
After filing a legal argument and citing precedent that ChatGPT had fabricated out of thin air, it made national headlines in all the wrong ways.
“Fake it until you make it might work in Silicon Valley, but for the rest of us, I think once bitten, shy might be more appropriate,” he said in a recent Bloomberg podcast, warning that the hype surrounding artificial intelligence has spawned concentrated market bubbles reminiscent of the dot-com era. “If artificial intelligence cannot be trusted […] In my opinion, then, artificial intelligence is actually useless.
