U.S. Stocks Soar 10% on Fed Rate Cut, AI Boom

In the past week, the U.S. stock market has surged to new historical highs following the Federal Reserve's announcement of its first rate cut this year. This has sparked a short-term "honeymoon rally," driven by optimism surrounding a more relaxed financial environment and the boom in artificial intelligence. This surge seems to have broken the so-called "September curse," where the stock market typically underperforms during this month.

Wall Street's optimism has reached new heights. Strategists from Wells Fargo, Barclays, and Deutsche Bank have recently raised their targets for the S&P 500 index, citing strong earnings, the AI investment cycle, and the Federal Reserve's more accommodative policies as pillars for the next market rally.

One strategist noted that even if the current market conditions resemble a bubble, it may not be ready to burst yet. Historical data shows that past bubbles have seen an average increase of 244% from their trough to peak. Given this standard, the "Magnificent Seven" tech giants, which have risen 223% since their March 2023 low, may still have room to grow.

Another strategist agreed, pointing out that AI-driven productivity gains and robust earnings prospects justify higher market valuations. They emphasized that the S&P 500's valuation of around 23 times expected earnings is high by historical standards but argued that comparisons to past cycles are not entirely applicable. The current S&P 500 is dominated by communication services and tech growth stocks, which naturally have higher return on equity and profit margins.

However, there are also warnings about the potential for economic overheating. One strategist expressed concern about a "melt-up" scenario, where investors, fearing they will miss out on market gains, rush into the market without fundamental changes, leading to an unsustainable rally and eventual market collapse.

Other seasoned market participants share similar concerns. One veteran investor cautioned that easy monetary policy could lead to an unstable market rally without addressing structural issues like labor supply shortages. They warned that rate cuts in a healthy economy could fuel speculative behavior driven by FOMO (fear of missing out), which often ends in sharp corrections.

Another strategist described the current environment as both highly favorable and fragile. Even bullish analysts acknowledge future risks, with firms like Citigroup, Fundstrat, and Evercore ISI warning that high valuations, narrowing breadth, and increased tech volatility could make the near-term path more challenging, despite the long-term bull market driven by AI.