Markets climbed ‘walls of worry’ for much of this year, can they keep that up?
Finding investor optimism
One of the core drivers for bearish outlooks this year has been the steady rise in interest rates alongside what Wong describes as “stubborn” rather than “rampant” inflation. He argues that the need to invest heavily in AI infrastructure has been the primary reason interest rates have moved up this year, pointing to an optimism around AI growth rather than pure pessimism about rising costs.
Earnings have also helped buoy sentiment. Earnings growth this year has outpaced price appreciation on the S&P 500, resulting in a relative pullback in valuation while prices for large-cap US equities have hit or exceeded all-time highs. Wong notes that this earnings growth has been broad, covering 10 of the 11 sectors on the S&P 500. While AI-related exposure in many of those sectors and companies has buoyed earnings, Wong notes that the breadth of this earnings growth should be taken as a positive.
The widening scope of the AI narrative has also played a role in this broader earnings growth. The number of companies exposed to AI infrastructure investment has grown rapidly from just Nvidia, in 2023, to most of the world’s chipmakers and hardware manufacturers. The story has grown enough to encompass energy utilities, minerals and mining companies, and construction vehicle manufacturers like Caterpillar. Despite all the companies that have enjoyed earnings and/or stock price bumps from the rise of AI, Wong notes that in the rise of past general purpose technologies like the internet, electricity, and the automobile, the builders of infrastructure haven’t realized the most long-term value. He believes something similar will eventually happen with AI
AI’s long-term role in markets, economies
Rather than seeing AI productivity gains and infrastructural demand as long-term tailwinds for the current crop of tech leaders, Wong says that AI will eventually be viewed more as a utility. It will be treated, in his view, as a social necessity upon which countless businesses rely, like electricity. Much like electricity, AI will not be assessed on an ROI basis. Wong believes that the technology will eventually power future industries like robotics. In the meantime, he notes that there will be speculative forces around AI which can result in overinvestment, even if AI is a productive technology in the long-term.
Liquidity is one factor that Wong is watching closely to assess questions of overinvestment, hype, and productive promise. He notes that without the AI buildout, much of the liquidity injected into the market during the COVID-19 pandemic would continue to find extremely unproductive outlets like NFTs and collectible cars, which he notes are typically wealth destroying and inflation-increasing because they lack any productivity returns. Now, however, that liquidity is chasing after very specific AI data center inputs, which seem to have direct productivity outputs.
