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Portfolio > Economy & Markets

Stock Rally Is Deepening Beyond AI-Fueled Craze

By Rita Nazareth

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The stock rally driven by the exuberance surrounding artificial intelligence is widening beyond the tech industry, defying skeptics and raising concern about an overbought market.

Mounting bets that the Federal Reserve will end its tightening cycle sooner rather than later to prevent a recession added more fuel to the equity advance, with the S&P 500 topping 4,400 and rising for a sixth straight day.

The Nasdaq 100 extended this year’s surge to almost 40%, and the Dow Jones Industrial Average was on pace for its highest since December.

Microsoft Corp., which has unveiled a procession of AI-based products in recent months, climbed toward a record. Lennar Corp. led a rally in homebuilders on a bullish outlook.

Restaurant chain Cava Group Inc. more than doubled in its trading debut. Delta Air Lines Inc. climbed for a 15th straight session — which would be its longest winning run ever — after its board voted to restart the company’s quarterly dividend.

A gauge of U.S.-listed Chinese stocks jumped with Beijing seen rolling out more stimulus to help the economy.

Equities continued to gain traction after the U.S. benchmark crossed the bull-market threshold last week, surging more than 20% from its October low.

Traders kept piling into stocks even after the S&P 500’s 14-day relative strength index topped 70 — which is seen by some traders as one indication of an overbought market.

In a recent poll by the National Association of Active Investment Managers, equity exposure increased at the fastest pace in more than two years. At 90%, the reading was the highest since November 2021.

“U.S. stocks have defied skeptics and rallied this year in the face of bank collapses, constant fears of a recession, and what’s expected to be a slowdown in corporate profits,” said Arthur Hogan, chief market strategist at B. Riley Wealth. “For our part, we assume that inflation will look better in the second half.”

Market Breadth

Market breadth has improved notably, with multiple sectors exhibiting stronger relative strength trends, according to Dan Wantrobski at Janney Montgomery Scott.

“All this being said, our concern grows that leadership areas like the Nasdaq 100 index and S&P 500 remain very overbought/extended on a short-term basis,” wrote Wantrobski. “While we understand that overbought conditions such as these can last for some time, we also understand that historical data illustrates they cannot be sustained indefinitely.”

Wantrobski says he remains “on guard” for a period of profit-taking or consolidation in the coming days or weeks.

Bonds reversed course, with the yield on 10-year Treasuries declining six basis points to 3.72%. The euro climbed as the European Central Bank lifted interest rates by another quarter-point, with President Christine Lagarde describing a further hike in July as “very likely.”

The move came a day after Fed officials paused their series of interest-rate hikes, but projected borrowing costs will go higher than previously expected, owing to what Chair Jerome Powell called surprisingly persistent inflation and labor-market strength.

‘Awkward’

The Fed is now in a “data-dependent” mode before it delivers what may be just one final increase in U.S. borrowing costs next month, former Vice President Richard Clarida said.

“It was what I would call an awkward but hawkish pause,” Clarida, who is now a global economic advisor at Pacific Investment Management Co. told Bloomberg Television on Thursday.

The U.S. economy is holding up, but losing steam.

While an advance in retail sales last month exceeded nearly every estimate, the report also showed consumer demand has moderated from the past year. Separate data Thursday showed factory production remained sluggish and applications for unemployment benefits held at the highest level since late 2021.

Elsewhere, oil rebounded as strengthening demand in China outweighed concerns over further interest rate hikes in the US. West Texas Intermediate futures traded near $70 a barrel on Thursday after falling 1.7% in the previous session.

(Image: Shutterstock) 

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