The AI boom will stay with the S&P 500, says one of most pessimistic Wall Street firms heading into 2023

The team led by Manish Kabra say the “AI boom” stocks have added 500 points to the index, and those gains aren’t about to vanish.

The SocGen team say AI-driven surprises led to a 3% to 4% increase in S&P 500 earnings per share this year. And they note other positive, bottom-up signals. The breadth of earnings per share revisions is less negative than anticipated, and profit margins are starting to improve against the odds indicated by leading indicators.

There’s also a reshoring boom of non-residential construction.

That said the French bank still sees macroeconomic concerns, listing indicators such as the yield curve, lending standards, the new order components of the Institute for Supply Management’s indexes and its own measures of the U.S. consumer, profit growth and global economic surprises.

“As the profit-margin reversal, credit weakness and sharply rising recession risk will most likely be visible in [the first half of 2024], this should bring the S&P 500 back to 3,800,” SocGen warns.

They list two positive and negative risks. One is the AI boom feeds into the market like the TMT bubble of the 1990s, which would send the S&P 500 to around 5,500, with the market pricing the index at 25 times forward earnings as was seen after the rate cuts in 1998. The negative risk would be anything that leads oil
CL.1,
-0.24%
to move above $100 per barrel, which would trigger a second hump on U.S. consumer prices and force the Fed to get even tighter.

The market

After Tuesday’s downturn, futures
ES00,
-0.24%

NQ00,
-0.32%
traded lower. In fact most assets were fairly steady, apart from bitcoin
BTCUSD,
+2.69%
which was trading around $29,000 amid recent institutional activity in the crypto space.

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The buzz

Ahead of his House Financial Services Committee appearance at 10 a.m. Eastern, Fed Chair Jerome Powell told lawmakers to expect higher interest rates.

Chicago Fed President Austan Goolsbee separately will take part in a moderated discussion.

In the U.K., inflation rose at a hotter-than-forecast 8.7% year-over-year rate, raising the possibility of a half-point Bank of England rate hike on Thursday.

FedEx shares
FDX,
-0.78%
are due to see pressure as the company forecast earnings below Wall Street estimates.

A Congresswoman lit up Twitter by posting her nearly $800 receipt at Costco.

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The chart

China has quietly become an auto exporting heavyweight, notes Brad Setser, senior fellow at the Council on Foreign Relations and a former Treasury Department economist. He said it’s on track to become a net exporter of autos and auto parts to the European Union by the end of the year.

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