Stock prices and the mean expected NGDP growth rate sharply rose again last week, in the midst of a second-in-a-row. month-on-month increase in the core PCE inflation rate, which was in-line with expectations. Core PCE inflation continued a downward trajectory on a year-over-year basis, however.
A slight downward revision of GDP for the last quarter had similarly little apparent effect on markets.
This represents a net positive nominal shock, as inflation expectations rose a bit above the Fed’s target in core PCE terms. Hence, the stock market is still in the position of being unable to sustain the bull run sans additional positive real shocks.
That is while the economy is still expected to slowdown later this year, consistent with the Fed Funds futures, which predict a series of rate cuts beginning as soon as late spring.
A large driver of stock prices continues to be optimism over the development of AI technology, which has driven the stocks of AI chip designers such as Nvidia and AMD up several fold, since the release of ChatGPT 3.5. Early new generation LLM integrators such as Microsoft have also seen significant price gains over this period. Nvidia and Microsoft now have market caps exceeding $2 trillion and $3 trillion, respectively. This indicates an expected, notable sustainable boom in AI investment for the foreseeable future. There’s obviously no reason to believe such investment will end, though it could wax and wane with the expected rate of technological advancement, going forward.
So, there continues to be extremely high long-term optimism for the US economy and stocks, with rather mixed prospects for the next few years. Shorter-run optimism is tempered by running up against afore-mentioned above-target inflation expectations and seemingly growing domestic political and geopolitical risks.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
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