S&P 500 Set Another New High: Broader Market Rally Set to Outshine Tech Dominance

On the eve of the Federal Reserve's interest rate meeting, the S&P 500 index notched yet another record closing high—its 18th for the year—surging over 8% year-to-date and outperforming both the Nasdaq Index and the Dow Jones Industrial Average.

One possible reason is that trending generative artificial intelligence is expected to rapidly scale up global power demand.

"We expect growth upside for power providers and data center infrastructure stocks, but do not expect GenAI power to move the needle for regulated utilities," Morgan Stanley analysts wrote in the research note last month. "We believe the rapid power demand growth from GenAI is not well understood, and not priced into a number of stocks."

Bank of America has raised its profit forecast for the S&P 500 index in a recent report, anticipating a 12% profit increase for the index's constituent stocks this year. Its report indicates that 2023 is a transitional year for U.S. businesses that have now adjusted to the new higher interest rate environment and mediocre demand. Tech giants like Microsoft, Amazon, Google, and Meta are expected to spend $180 billion on capital expenditures this year, potentially benefiting from a "virtuous cycle" spurred by investments in artificial intelligence.

The rapid development of the semiconductor and technology sectors, along with increased electricity usage and physical construction of data centers, is expected to drive greater demand for electrification, utilities, and commodities. Bank of America predicts that as large tech companies enter an investment cycle, a resurgence in demand will be the key driver of profit growth and further margin expansion through 2025.

Meanwhile, Société Générale also suggests that robust performance and signs of a re-accelerating U.S. economy vindicate the market's uptrend. Analysts at the bank believe the current rally is driven more by rational optimism than irrational exuberance, pointing to better-than-expected corporate earnings breadth, a new profit cycle peak, and improving global leading indicators.

However, another strategist from Bank of America, Savita Subramanian, acknowledges some risks in the U.S. stock market but contends that the overall trend is decidedly upward, with pullbacks presenting opportunities to buy U.S. stocks at a discount. She suggests that if the rally in large tech companies, particularly those related to artificial intelligence, continues, it could lead to a healthy pullback—possibly around 5% for the S&P 500—but should not hinder the index from reaching new highs subsequently.