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It’s all about the earnings.
As stocks sit near record highs and the S&P 500 (^GSPC) caps its best month since November 2020, Wall Street is pointing to earnings, especially within the AI trade, as a key driver of further market gains.
“It’s a boom,” said Andrew Graham of Jackson Square Capital. “It’s really hard for the market to go down when you have double-digit earnings growth,“ referring to an expected 15.1% earnings growth for the first quarter.
The latest scorecard gives reason for optimism. As of late April, 84% of the companies that have reported earnings showed a positive earnings surprise, according to FactSet data.
With higher corporate earnings, “we are still riding the rails on the Roaring 2020s Express. Nothing seems to stop or derail this train,” veteran strategist Ed Yardeni said in a client note on Friday.
Increased capital expenditures on AI from Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Alphabet (GOOG, GOOGL) are helping fuel virtually every corner of the AI trade.
Even equipment maker Caterpillar (CAT) hit record highs last week amid surging sales for its power and energy engines and industrial turbines for data centers.
All that spending is also seeping into economic data.
Business investments in the first quarter were the primary driver of real gross domestic product. It contributed more to the 2% GDP expansion than consumer spending, the traditional engine of the economy, according to data from the US Bureau of Economic Analysis.
With oil above $100 and the Strait of Hormuz still closed amid a US-Iran standoff, AI investment may be one of the key forces holding the economy together.
“I think we’d be likely in a recession already if not for the AI investment driven boom,” Moody’s Analytics chief economist Mark Zandi told Yahoo Finance on Friday. He noted businesses are also benefiting from tax incentives for investments.
Still, stock reactions within Big Tech players have been mixed as investors weigh strong results against rising spending, particularly with Meta.
The social media giant, along with Microsoft and Apple, flagged rising costs for memory chips, which are needed for everything from data centers to laptops.
“Memory that everyone needs in the technology space is now skyrocketing in price. How long can companies negotiate this? They’ve been doing an amazing job. The answer is not forever, so we can’t get complacent,” Tom Essaye, founder of Sevens Report Research, told Yahoo Finance.
UBS analysts continue to see stocks higher this year, with a target of 7,500 by the end of 2026, pared in April from 7,600 due to higher energy prices.
