The bear market is over.
But the bear economy isn’t. The eurozone has sunk into recession and some economists fear the United States is next. We’re worrying about rate hikes, inflation, lower spending, layoffs, surging mortgage costs and a war in Europe.
That’s a strange place to find a bull market.
“You tend to see bull markets coincide with economic expansions, not economic contractions,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute.
So why are there bulls running around in a bear economy? It comes down to just two letters: AI.
The recent surge in market strength has been largely driven by just a few mega cap tech stocks. After a horrible year for Big Tech in 2022, optimism has returned as ChatGPT has made AI the it-thing in Silicon Valley. Investors are placing big bets on Alphabet, Meta (META), Apple (AAPL), Amazon (AMZN), Nvidia (NVDA), Tesla and others, hoping they can drive a new tech revolution with artificial intelligence.
The returns from those five names this year are the largest we’ve seen in the past two decades, said Matt Bartolini, head of SPDR Americas research at State Street Global Advisors. This year, Nvidia’s stock is up 163%. Meta is up 120%. Tesla has surged 90%. And Apple, Amazon and Google are all up 40% or more.
That’s because those companies are benefiting directly from the AI boom.
“AI is a very big tent,” said Bartolini. It’s not just about search and ChatGPT, it encompasses everything from auto correct on Apple iPhones to the ads Amazon customers are served, he said.
Those companies, which are six of the seven highest-valued companies in the S&P 500 (Berkshire Hathaway, just ahead of Meta, is No. 6), make up 28% of the S&P’s total value. In other words, tech is driving the market.
A narrow market
The S&P 500 rallied Thursday to end the day in a bull market, marking a 20% surge since its most recent low, reached on October 12, 2022. That brought an end to the bear market that began in January 2022, since a 20% lift from recent lows is generally accepted as the definition of the start of a bull market.
However, there is no exact definition — and the current market situation is a bit more nuanced than the typical bull market-bear market binary.
The very narrow market leadership by AI-adjacent tech stocks “is not a sign of a quality rally or bull market and this phenomenon leads to a market correction of some kind,” warned James Demmert, chief investment officer at Main Street Research.
On the surface, Big Tech is seems to be “solving” the market’s problems, but cyclical and smaller companies are suffering below.
“Real estate is down, materials are down, energy is down, financials are down,” said Bartolini. “This is not a cyclical recovery.”
The S&P 500 is up about 12% so far this year, but the strength beneath the surface does not indicate that we will see similar gains over the next six months, he said. “Not all boats are rising with this tide.”
Less than a quarter of the stocks in the S&P 500 are actually beating the index. “That’s a pretty low amount,” said Bartolini.
The silver lining
Entering a bull market lifts investor sentiment, which could propel upward momentum in markets. Investors are certainly in a buying mood: CNN’s Fear and Greed Index registered “Extreme Greed” Friday.
“We don’t put a lot of stock (pun intended) in arbitrary definitions,” wrote analysts at Bank of America on Friday. But after crossing the 20% mark, the S&P 500 on average continued to rise over the next 12 months 92% of the time with a 19% average return, they noted.
“The more likely direction of surprise is still positive,” they wrote.
