AI Surge Powers Year-End Stock Market Rally Amid High Valuations

Nuveen Asset Management LLC's Chief Investment Officer, Saira Malik, underscores the prospect of a continued rally in the U.S. stock market as the year comes to a close. Malik suggests that robust corporate earnings, particularly from tech behemoths, will serve as a stabilizing force. The ongoing fascination with artificial intelligence (AI) further supports this optimism, marking AI as a core driver of growth.

Malik observes that the fourth quarter often proves strong for equities, especially after early-year gains. She highlights the increased probability of an extended rally fueled by easing trade tensions, AI advancements, and expectations for further interest rate cuts by the Federal Reserve. S&P 500 has surged by 35% since its April low, propelled by AI-centric giants like Nvidia, Google, and Broadcom.

Despite high valuations sparking concerns of a market bubble, Malik believes strong corporate performance can uphold current valuations. With the third-quarter earnings season on the horizon, Malik anticipates that profits will surpass expectations. Analysts predict a 7.4% growth in S&P 500 component profits, marking the smallest increment in two years.

Malik emphasizes that tech stock gains primarily stem from earnings growth rather than valuation lifts. She points to select AI-dominant companies maintaining stable earnings as a favorable factor for sustained tech sector prosperity. Moreover, for cautious investors wary of current valuations, she suggests exploring sectors outside chip manufacturing, such as those linked to data centers.

Bears highlight potential risks, including economic data release disruptions from a possible U.S. government shutdown and uncertainties in the labor market. However, history favors Malik’s optimistic outlook, noting that when the S&P 500 hits a September high, as it did this year, fourth-quarter gains average 4.8% since 1950.