Right now, the stock market is up 15% year-to-date (YTD). In fact, it’s on track to have one of its best years of the past several decades.
Though it doesn’t really feel like it.
Sure, some AI hardware stocks are having a banner year. Super Micro Computer (SMCI), for example, is up nearly 200% YTD thanks to surging demand for its AI-optimized server equipment. Similarly, Nvidia (NVDA) is up 150% on soaring demand for its Blackwell AI chips. And many others – like Arm (ARM), Dell (DELL), Vertiv (VRT) and Pure Storage (PSTG) – are all up more than 80% this year.
Those stocks are partying like it’s 1999 all over again.
And it seems no one else got the invite.
Indeed, about half of the stocks in the S&P 500 are actually down this year. Around 80% are up less than the index’s 15% year-to-date gain.
In other words, a select few super-strong AI hardware stocks have been leading a very narrow stock market rally.
But we’re very confident that is all about to change.
What’s Driving the Coming Stock Market Shift
The simple reality is that AI hardware stocks have been the lone winners in the 2024 stock market rally. Why? Because they’ve been the only firms driving huge earnings growth.
And stocks follow profits. When profits rise, so do stock prices.
Right now, profits for AI hardware firms are soaring because companies are spending billions to build the infrastructure necessary to develop new AI applications, products, and services.
Meanwhile, profits for most other firms are struggling because the economy is being hampered by high interest rates. In fact, excluding Big Tech, earnings across the rest of the S&P 500 actually dropped 0.1% in the first quarter of 2024.
That’s why most stocks have struggled this year. Their profits aren’t growing!
But we believe the Federal Reserve is going to cut rates – and soon.
Inflation is easing while the labor market has begun to cool rapidly. That means the central bank is close to fulfilling its dual mandate: stable prices and full employment. Once that happens, the cuts will begin.
Currently, the market is pricing in 65% odds that the first rate cut will happen in September. It’s also expecting two full rate cuts by the end of the year.
Folks, the rate cuts are coming…
And so, too, is the Great Broadening of 2024.
The Final Word
As the Fed cuts interest rates, the economy will restrengthen thanks to lower mortgage, auto financing, loan and credit card debt rates, etc. And as the economy restrengthens, more and more companies will benefit from positive earnings growth.
That’s why – excluding the Big Tech firms – earnings growth across the rest of the S&P 500 is expected to improve from -0.1% in Q1… to 5.6% in Q2… to 6.4% next quarter… and then 11.2% the quarter after that.
The earnings recovery is underway!
And we believe that as earnings growth across the market starts to broaden out from the Big Tech firms, the stock market rally will do the same.
We’re calling this the Great Broadening of 2024.
In this broadening, the stocks that lagged in the first six months of this year due to a lack of profit growth should surge in a massive ‘catch-up’ rally over the next six months.
That’s why, right now, we’re laser-focused on finding and recommending the stocks primed to soar in that ‘catch-up’ rally.
Check out a few of the names we’re pounding the table on today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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