Deciphering the intricacies of the global stock market, it appears the artificial intelligence (AI) hype is the prime driver behind the recent surge, predominantly in the US.
However, upon delving deeper, this assertion seems like a smokescreen, with hidden truths behind the market’s performance.
A closer look at the US market
An indisputable fact is that a select few American giants are pulling the entire stock market upwards. The sheer power of these corporations is evident, with the top ten S&P 500 companies contributing to over 76% of the total index growth in the first half of the year.
Stripping away their influence would lead to a modest 4% growth in the US stock market.
What binds these top performers, apart from their purported connection to AI? Interestingly, they are the phoenixes that rose from the ashes of their dismal performance in 2022, where their stocks plummeted by an average of 50% from their 2021 peak.
Hence, it’s prudent to question the impact of AI on their meteoric rise. If AI was the panacea, why are about 40% of Nasdaq composite stocks still languishing, 75% or more below their highs from two years ago?
The global perspective
Shifting the lens to a global perspective, the AI narrative seems less potent. The world is witnessing a significant rally, independent of the AI narrative.
Looking at equal contributions from the US, Europe, and Japan markets, it’s the best start to a year since 1998, according to Lapthorne of SocGen. Japan’s market, in particular, is on a roll, recording its best start since 1999, when evaluated in dollar terms.
However, the underlying causes behind these international rallies paint a different picture. Europe and Japan owe their success to value stocks, while the US leans on its ever-reliable growth stocks.
A stronger-than-thought market?
Does this broader rally hint at a healthier stock market than originally perceived? It’s tempting to think so. But assessing a market’s vitality based on the breadth or narrowness of stock market runs has always been somewhat misleading.
It’s worth noting that merely 2.4% of companies account for nearly all the global stock-market-wealth creation between 1990 and 2020, a whopping $76tn.
Instead, a more reliable contrarian indicator could be more illuminating. This alternative method, yet to hit mainstream headlines, could offer insightful interpretations of the current global stock market scenario.
The global stock market, like an iceberg, reveals only a fraction of its full form on the surface. One must dive beneath the surface to understand its true nature.
While AI is undoubtedly revolutionizing various sectors, attributing the recent stock market performance solely to it seems simplistic.
The interplay of myriad factors, including the rise of value stocks in Europe and Japan and the resurrection of top performers from 2022, is equally responsible for the current state of the stock market.
As investors, it is imperative we keep our ears to the ground and eyes on the horizon, ready to adapt to the ever-evolving global market trends.
