Understanding Why Stocks Hit New Highs

Understanding Why Stocks Hit New Highs

Most major stock indices hit new all-time highs last week (including the Russell 2000) and here’s why... There are now three separate forms of economic stimuli hitting the economy and companies, and those are combining to increase expectations for economic growth and corporate earnings.

Last week, the Fed cut rates but, more importantly, signaled that a rate-cutting cycle has started. That matters because it means monetary stimulus is now occurring, which is positive for the economy and, peripherally, risk assets. Monetary stimulus now joins two other previously existing stimuli already helping the economy: fiscal and private.

Fiscal stimulus is occurring via the passage of the One Big Beautiful Bill, which solidified and boosted tax cuts, as well as unleashed billions in Federal dollars across various industries. Private stimulus, meanwhile, is occurring through massive AI-linked capital expenditures from major tech companies such as META, MSFT, AMZN, ORCL and others (remember, these mega-cap tech firms could spend more than $500 billion on AI infrastructure over the next two years!).

The result is a powerful three-way tailwind on stocks that has sent the major averages to new highs but also is now favoring the run-hot sectors and strategies we profiled last week and those should continue to outperform as long as the three-part stimulus remains in place.

However, while there are three tailwinds on risk assets, it doesn't mean this is a risk-free market. First, economic growth can slow. Obviously, the labor market is weakening and it’s entirely possible that negative impacts of tariffs and other policy changes begin to weigh on growth later this year. Essentially, it would mean that rate cuts were too late. If growth slows unexpectedly, we will have a pullback or worse in stocks.

Second, AI Enthusiasm could wane. What’s happening in AI is not the same as the tech bubble of the late 90s but there are similarities, and the idea that the cap-ex bubble pops if AI isn’t adopted as quickly as expected shouldn’t be discounted.

Bottom line, right now there are powerful stimulus forces supporting risk assets and as long as economic growth is solid and we do not see the AI cap-ex pace begin to slow or break, then the path of least resistance for stocks is higher and the sectors and factors in our run-hot market basket should continue to outperform.

However, if growth starts to slow or doubts emerge about AI adoption and the pace of cap-ex does start to slow, then the market will be very vulnerable to a pullback. We should get some indicators of that before it happens. I don’t see that risk as high.

This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc.