The S&P 500 rose 9.3% ytd through July 2. Can it rise another 10.2% over the rest of this year to achieve our S&P 500 target of 8250? We still think so. Consider the following:
(1) FOMO vs FEMO. Is it time to underweight the S&P 500 Information Technology sector? It is if you believe the AI trade is a bubble about to burst. We think it has been losing some air already, so it’s less likely to burst. We are sticking with our recommendation to market-weight the sector.
Investors are suffering from AI fatigue. They aren't convinced that the huge investments in AI infrastructure will earn a good rate of return. They are worried about the possibility of excess capacity and increasing competition among AI providers, including the ones from China. They are unsettled by the decline in token prices, though the impact of that on providers’ revenues might be offset by greater usage. The rapid pace of technological innovation also increases the risk that today's expensive state-of-the-art semiconductors (including memory chips) will be made obsolete by the next wave of innovation.
Nevertheless, we don't buy the bubble stories that compare the current bull market in stocks to the tech bubble of the late 1990s, which was followed by the Great Tech Wreck (GTW) of the early 2000s. The current forward P/E of the S&P 500 Information Technology sector is 22.2, not much above the S&P 500's 20.4 (chart). Just before the GTW, the former peaked at 55.0 and the latter did so at 25.0.
