2024 has seen most of the world’s stock markets, including ours, hitting new highs. While economic growth remains relatively soft, investors seem to be giving the economy a vote of confidence by bidding equity markets higher. That confidence isn’t necessarily unfounded. Employment, consumer spending, and the housing market are all holding their ground in the face of current economic headwinds, at least for now. At the same time, spending in the technology sector has exploded.
Part of that is a result of the CHIPS Act (the actual and quite corny title; “Creating Helpful Incentives to Produce Semiconductors”). Passed in 2022, the act was meant to help shift some high-end semiconductor manufacturing to the United States and away from Taiwan, which is under increasing political pressure and potential military threat from China. As a result, several companies have announced large investments in new domestic facilities.
The other major source of the capital expenditure boom is the AI race. Technology companies are investing heavily in the development of artificial intelligence, and most of them have announced a significant increase in their projected spending in that area. That, in turn, has increased investment in the hardware production and server capacity necessary to run such software, with those companies seeing a massive spike in demand.
Meanwhile, economists and market strategists continue to upgrade their economic forecasts based on the increasingly-popular belief that inflation is under control, interest rates have peaked, and the United States will avoid a recession in the near term. Raymond James Investment Committee came into the year predicting a recession that is “so mild that markets barely notice it”, but now say that they no longer anticipate a recession at all in 2024. This echoes a rising consensus among financial firms.
Of course there remain legitimate concerns. The stock market, especially the US market, remains very expensive, with valuations still among some of the highest on record. The market also remains very concentrated, with just a handful of large technology-related companies accounting for an outsized share of price appreciation and market capitalization.
Inflation and interest rates are continuing concerns as well. Inflation could remain more persistent than expected, or even reaccelerate due to geopolitical pressures on factors like shipping and trade, for example. Were that to happen, interest rates may also remain higher for longer than expected. And finally, there are those pesky recession indicators, particularly the yield curve inversion, which continue to flash warning lights.
While investors may grow increasingly numb to these risks with each passing day, ignoring them doesn’t change the fact that they exist. We can only hope they turn out to be false alarms. We’ll be here either way.
The information above represents the opinion of financial advisor Travis Rus, and is not necessarily that of Raymond James. It is not a complete summary of all available data necessary for making an investment decision and does not constitute a recommendation, nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Investing involves risk and you may incur a profit or a loss. Past performance does not guarantee future results.
