AI is a business cycle.

AI For Business


“If they don't cut rates this month, they should send a strong signal that they will in September,” Lemmack wrote. The Fed next meets on July 30-31, and markets are currently pricing in just a 5% chance of a rate cut then. “The labor market remains healthy, but tightening policy has taken a toll,” economist Julia Coronado wrote. “Inflation is also slowing, so there's no need to keep nominal rates pinned at 5.5%.”

This follows Wednesday's ISM service report: Unexpectedly contractedIt was at 48.8 (50 is the dividing line between whether a sector is expanding or not). Meanwhile, manufacturing, which bulls had been hoping would return to growth after years of post-pandemic contraction, recorded a third straight month of declines below 50 on Monday.

But stock markets have continued to rise this year despite the data, perhaps with investors hoping that rate cuts will ultimately help keep the economic cycle going. Or maybe the AI ​​innovation cycle is distorting things. As Piper Sandler's Michael Kantrowitz wrote on Friday, S&P coverage halted 500“The 'market' no longer represents the stocks in the market.”

He noted that the 10 largest stocks now make up 37% of the S&P 500 (up from less than 25% before the pandemic) and that correlation is at its lowest in data going back more than 20 years. [price] “Is the S&P 500 target really useful if only a handful of stocks represent it?” he asked.

Of course, all big tech stocks are benefiting from the rise of AI: some directly from their cloud businesses, others because they sell the hardware or software that adds these capabilities, and still others because AI can help them sell more or better ads, or perhaps because of the hopes that it will help with the development of self-driving cars and robotaxis.

Even the non-tech stocks that have done well this year (utilities, data centers, etc.) are in large part born out of the need to build and support AI capabilities. So is the AI ​​boom masking broader weakness in the current business cycle? Or, in other words, Is AI now a business cycle? It would be nice if the Federal Reserve could set one interest rate for them and a different, much lower, interest rate for everyone else.

See you at 1pm!

Kelly

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