AI hype is masking recession signals in the market
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Stocks keep hitting record highs in large part due to excitement over artificial intelligence. That growth is clouding recessionary signals in more cyclical corners of the market.
Why it matters: Don't confuse record highs for signs of economic growth.
What they're saying: "The evidence is plentiful that the economy is slowing," Alessio de Longis, senior portfolio manager and head of asset allocation at Invesco, tells Axios.
- People are staying unemployed for longer.
- The chilling effect of policy uncertainty is slowing hiring.
- Tariffs have yet to fully impact prices, which could thwart consumer spending further.
Situational awareness: Despite this backdrop, stocks are up. That bucks the historic pattern of stocks dropping ahead of recessions.
- That hasn't happened yet at the aggregate level because of the market concentration into AI names, says Kristina Hooper, chief market strategist at Man Group.
- Wall Street is more disconnected from Main Street, she says, because of the amount of money tech companies are spending on each other.
- That investment is driving market performance rather than consumer spending.
Zoom in: Cyclical corners of the market tied to the economy, like small and mid-cap companies and health care, were struggling until the Federal Reserve hinted at interest rate cuts.
- On an aggregate level, the market is still experiencing higher-than-expected earnings growth.
- But that aggregate data is being driven up by AI-related earnings growth, de Longis says, crowding out signs of earnings recession in more cyclical and defensive sectors.
Yes, but: A market rotation is already underway.
- Rate cut signals coupled with a belief that AI could increase productivity across the market is driving investors to unloved sectors, especially smaller companies more affected by interest rates.
The bottom line: The outlook is incredibly uncertain, which adds to the need for investors to diversify and hedge, Hooper said.
- That view is part of what's driving up international stocks and gold as investors look to hedge their exposure to the U.S. without getting out.
- They can't afford to leave the states fully because of all that AI growth.
