Investors Brace for Cooling of AI-Driven Market Surge, Poll Shows

Market Outlook
According to a Reuters poll of market strategists, the S&P 500 index is expected to trade near its current record levels by the end of 2024. The median forecast of 41 equity strategists, analysts, brokers, and portfolio managers collected from August 8-20 suggests the S&P 500 will end 2024 at 5,600 points, close to its current level of 5,608 as of Monday’s close.
This contrasts with a May poll, where market strategists had expected the S&P 500 to trade nearly unchanged for the rest of the year. Since then, the index has climbed over 5%, backed by sharp gains in technology giants like Nvidia, Microsoft, and others racing to dominate the emerging AI technology.
AI Rally Losing Steam
The report suggests that the AI-driven rally in the stock market is starting to lose steam, as investors wait for a widely-expected interest rate cut by the U.S. Federal Reserve next month. Concerns about a potential economic slowdown and the unwinding of leveraged positions have also contributed to the market’s recent volatility.
“The AI sugar high is fading and the market is coming to grips with a possible slowdown in GDP,” said Synovus Trust portfolio manager Daniel Morgan, warning of “little room for error” due to stretched valuations.
While the AI rally has benefited the market’s most valuable companies, much of the broader market has lagged behind. The median S&P 500 stock has gained around 9% this year, while sectors like consumer discretionary, real estate, and materials have only seen gains of around 5% each.
Challenges Ahead
Investors are also grappling with additional uncertainties, such as the neck-and-neck race between former President Donald Trump and Vice President Kamala Harris in the upcoming 2024 U.S. presidential election, as well as turmoil in the Middle East and concerns about the trajectory of future interest rate cuts by the Federal Reserve.
“It’s particularly difficult right now to forecast the stock market,” said Chase Investment Counsel President Peter Tuz, citing these various challenges.
Despite the overall bullish sentiment, over half of the poll respondents said a stock market correction of at least 10% is likely by the end of September. However, more than half also predicted that corporate earnings would beat expectations through the end of 2024.
Following this year’s rally, the S&P 500 is trading at 21 times expected earnings, compared to a 10-year average of 18, according to LSEG. This has raised concerns about stretched valuations and the potential for a market correction.