Key Concepts
- Corporate Profits: The primary driver of the current bull market, particularly in the tech sector.
- US Exceptionalism vs. Global Growth: The debate on whether the US will continue to lead tech earnings growth or if Asia and Europe will take over.
- Equal Weighted Index: A method to participate in the broadening of the market.
- Trade Tensions: A significant factor influencing the market, with upcoming deadlines and potential agreements.
- Market-Friendly Policies: Tax cuts and regulations that could drive market growth.
- AI Investment Cycle: The ongoing investment cycle in Artificial Intelligence and its impact on the market.
Corporate Profits Driving the Bull Market
The current all-time highs in the market, particularly in the Nasdaq 100, are primarily driven by strong corporate profits, especially within the tech sector. While only about 6% of the S&P 500 companies have been hitting new highs, indicating that the growth is not yet broad-based, the strength of corporate profits validates the positive momentum and suggests that the bull market is likely to continue.
US Exceptionalism vs. Global Growth
Bloomberg Intelligence suggests that the US is no longer setting the pace for global tech earnings, with Asia and Europe taking the lead. The growth advantage that the US has had is narrowing, with Europe accelerating from stagnation while the US is decelerating from a very strong starting point. However, the gap in valuations between US and international developed large-cap equities remains large. If the US dollar stabilizes in the second half, the earnings outperformance from US equities could bring US tech and US assets back into favor.
Investment Areas within the Tech Ecosystem
While hardware had its moment, software is still favored. The equal-weighted index is also a way to participate in the broadening market. Visa and semiconductors remain key at the center of the secular theory. The equal-weighted technology S&P making new highs relative to the market is an encouraging development. Broad diversification is recommended.
Trade Tensions and Market Volatility
Trade tensions remain a significant factor influencing the market. The trade deadline of July 9th is approaching, but the administration has indicated that it could be extended. Potential agreements with major trading partners could be unveiled in the coming days. The expected pivot towards more market-friendly policies, such as tax cuts and regulations, could drive market growth. However, there could be some near-term volatility and less friendly economic data that reflect a mildly stagflation impact.
AI Investment Cycle and Deal Making
The AI investment cycle is real, as evidenced by broader adoption and the results from companies centered in this space. As trade headwinds subside, more deals are expected to happen, which could be supportive of the market in the tech space. Examples include Palantir partnering with Accenture and Oracle's $30 billion per year cloud client.
Conclusion
The tech sector is currently experiencing a bull market driven by strong corporate profits. While the US may no longer be the sole leader in tech earnings growth, it could regain favor if the US dollar stabilizes. Trade tensions remain a significant factor influencing the market, but the expected pivot towards more market-friendly policies and the ongoing AI investment cycle could drive further growth.
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