Stephanie Link: Where to Invest as AI, Economy Keep Booming

“We don't have a lot of news between now and say October 14th, which is when earnings season starts again. So maybe we have a little bit of a volatile time,” Link said.

“I think you want to use any weakness to be buying, because I think the fourth quarter for earnings, the setup is very strong and I expect the markets to end higher from where we are.”

Link doesn’t usually set targets but said she expects stocks to end the year 5% to 7% higher.

“Could be even more,” she said.

The strategist explained her market outlook and offered views on sectors she finds attractive.

The big surprise this year has been the S&P 500’s 33% increase off the April 8 lows, she said, attributing it to the market “slowly chipping away at the unknowns,” which Link calls the TGIF — tariffs, geopolitical issues, inflation and the Federal Reserve.

Gaining Clarity

“We don't have 100% certainty, but if we wait for 100% certainty, the market's going to be up 50% from the April 8th lows,” she said. The biggest issue is the tariffs and their implication for inflation, “and the Fed has come around to it being a one-time thing.”

“I've never thought that the tariffs would be inflationary, and I don't think that tariffs get enough credit for actually supplying better growth to the economy because you have companies that are doing more business in the United States to avoid the tariffs,” Link said.

Tariffs should add hundreds of billions of dollars to the economy this year alone as companies bring manufacturing and more business here and diversify away from their concentration in China, she said.

“This started right after COVID because most companies got burned having a lot of their supply chains and manufacturing in China, and the diversification away has escalated with the tariffs,” Link added.

Strong Economy

There will always be questions surrounding unknowns, but companies are adjusting, Link said. “They are either increasing price or they're restructuring, reorganizing, but they're able to deliver on earnings. And that is the most important thing for equities. Stocks follow profits on the way up and on the way down.”

Second-quarter earnings came in much better than expected and estimates went higher as the economy is growing more than expected, she said. The Atlanta Fed GDP tracker came in at 3.9% for the third quarter, and the final second-quarter GDP came in at 3.8%, she said, noting the market is pricing in that growth.

The economy is doing so well partly because the consumer has been resilient in spending, savings and income, with wage growth on average running at roughly 5%, Link said.

“And they have jobs. The labor market is definitely slowing for sure, but it's not collapsing. And as long as consumers have jobs and wage growth and inflation is coming down … the consumer is using that extra spending power to buy goods and services,” mainly services, she said, noting gasoline prices are down 15% year to date.

Link also cited a manufacturing boom driven by tariffs, onshoring and reshoring, and the artificial intelligence-fueled data center buildout and grid infrastructure.

Where to Invest

She acknowledged the market isn’t cheap, but noted earnings are growing by double-digit percentages and margins and free cash flow are expanding.

While pockets of the market — mainly technology — are expensive, other sectors such as financials, industrials, housing and some retail are priced below the market, Link noted. And technology remains attractive too, given the AI boom, she said. “So there's a lot of places that you can look at and invest.”

While the market is gaining clarity on the unknowns, those areas — two in particular — also represent market risks, she noted.

“One, watch the labor market, because if the labor market starts to falter, then there goes my theory on consumer, and consumer is 70% of U.S. GDP, and the second is the Fed. They don't have to be this restrictive,” she said.

During COVID, she added, “they were amazing, A-plus, plus plus, but then they kept rates too low for too long,” and inflation wasn't as transitory as they thought. “Now I think they're a little late in terms of easing. I think they can ease.”

That said, “the economy is still growing at a very nice clip and we haven't seen a housing cycle yet. And I think if we do see lower interest rates, you will get a housing cycle that'll add even more tailwind to the economy,” said Link.

In addition, AI is fueling a huge capital expenditures boom, and it’s not just the Magnificent 7 mega-cap tech companies, she said. Infrastructure companies, utilities and power producers are seeing strong demand, she said, citing data center players Vertiv, Vistra and Novva Data Centers.

Advice for Advisors

Against this backdrop, advisors should remind clients that the S&P 500’s long-term total return over the last 50 years is 7.7% — over 20% in the last two years — compared with 3% in fixed income.

“I think you just stay invested. You stay diversified. … There's about $7 trillion of money on the sidelines and money markets. I don't think it should be there. Not everyone should be a hundred percent in equities, but I do think that long term, the returns are attractive.”

She recommends dollar cost averaging so clients over time can participate in equities and in fixed income.

“I think you pay attention to what the economy is telling you and the economy is doing well, and as a result, you watch earnings and watch the consumer … and appreciate this whole AI data center boom, because it really is a boom.”

The U.S. needs about 30,000 data centers by 2030 to keep up with demand, she said. “If you believe that, then you need to upgrade the grid, because we haven't upgraded the grid in over 50 years, and 75% of the grid is over 25 years old.”

The grid isn’t just AI, Link added. “The grid is electric vehicles, it's housing. So it's a real necessity to get this in better shape,” she said. “I do not think it is a bubble because there are too many companies, too many industries that are saying the same thing. That there is so much demand.”

Within the Mag 7 — or the Mag 8, because the semiconductor maker Broadcom has soared nearly 120% in the last six months — “I think you can own the set,” in addition to the industrial companies that will benefit from the AI boom, Link said.

“I think you can make good money. … They trade with Mag 7,” she said, also noting that utility companies are attractive because they’ll be raising prices to upgrade the grid.

Independent power producers also could be appealing, and housing is “probably my favorite theme for the next five years,” she said. People don’t think the housing market will recover, but “it’s going to recover, especially on lower rates.”

The U.S. is short 5 million homes, homebuilders have been under-producing for 15 years, and the market is starting to show signs of an uptick, according to Link.The 30-year fixed mortgage rate will probably need to dip into the 5% range before the market sees a real recovery, she said.