Bob Homan: Is the broad stock market rally a cause for celebration or concern?
Bob Homan: Is the broad stock market rally a cause for celebration or concern?
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
Investors should not only look at what is rising, but above all why it is rising.
The rally on the stock markets is fairly broad-based this year. Share prices are rising in virtually all regions and in most sectors. Whereas previously it was mainly the big American tech giants – the so-called Magnificent Seven – that were driving the market, this year smaller and less innovative companies are also joining in. Many analysts see this as a healthy broadening of the market. But is that really the case?
AI is already generating substantial profits...
There is little doubt that companies such as Nvidia (chip sales), Microsoft and Amazon (cloud space rental) are already profiting handsomely from the rise of artificial intelligence (AI). And this is expected to continue for some time. But ultimately, that money has to come from somewhere. Directly or indirectly, it comes from the pockets of consumers and businesses. And consumers can only spend their money once.
If the broader market also rises – not just the shares of clear AI winners – then the question arises: where does that extra earning capacity come from? Because unless we see a sudden acceleration in economic growth, it seems unlikely that everyone will earn more on a structural basis. In any case, we are hardly seeing that this year. The rise in the price of European shares, for example, is largely the result of an increase in valuations.
... but not yet by everyone
A broad rally implies that many companies are expected to benefit from the opportunities that AI will eventually bring. But if economic growth remains moderate and consumer spending does not grow rapidly, it will have to come from two other drivers behind the markets: falling interest rates or rising valuations. I expect capital market interest rates to remain stable in the near term and, in my view, valuations are already quite robust.
It therefore seems that the market is anticipating an acceleration in economic growth driven by the productivity gains that AI will bring. I have yet to see that happen. Although a number of industries will experience a significant surge in productivity, the jobs lost as a result will mainly be replaced in professions where productivity gains are less possible, namely those that require more one-to-one attention. This is precisely where extra demand will arise: through further digitalisation and because people are, after all, social beings.
Look carefully at why a share is rising
Of course, markets are forward-looking. And perhaps AI will eventually lead to an overall wave of productivity. But then you can assume that the benefits will accrue to a limited number of companies. Looking at it this way, the broadening of the rally is more a sign of overconfidence than of strength. It pays to look not only at what is rising, but especially at why it is rising. Because a broad rally without broad foundations may ultimately have a narrow exit.