The AI bull market seems unstoppable. Parallels with the past are becoming apparent.
The AI bull market seems unstoppable. Parallels with the past are emerging.
Stock prices go up the stairs but down the elevator. This old stock market wisdom describes how markets often rise slowly and steadily, but can suddenly and sharply decline.
This phenomenon is driven by investors' sentiment. Fear (during declines) is usually a stronger emotion than greed (during rises). More recent studies show that due to the huge increase in algorithmic trading, both declines and rises can occur at an accelerated pace.
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V-shaped recovery
A few weeks ago, the mood on the stock markets was very bleak. The tension in the Middle East seemed to be reaching a boiling point. The stock markets set what seems to be a bottom on March 30.
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The S&P 500 was nearly in a correction. An official correction is defined as a drop of 10 percent. However, what followed was a spectacular recovery. Within less than three weeks, the index rose by over 12 percent. It is a nice example of a so-called V-shaped recovery.
Unstoppable bull market
The war in the Middle East has failed to break the bull market. In fact, the American markets managed to reach an all-time high in the middle of an oil crisis. The Nasdaq also had one of the longest streaks of gains ever...
This bull market began in October 2022 with the launch of generative AI. The AI Bull has now lasted 1,287 (trading) days. There is an uninterrupted bull market when the rise is not interrupted by a decline of at least 20 percent. The war in the Middle East has, to date, been nothing more than an annoying short interruption of this rally.
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Dotcom in AI
The current bull market now ranks tenth in length in stock market history. Of course, that's nice, but it is still far from the longest ever.
Older investors may still remember the enormous rally of the late 1990s. This rally started in 1987 and only breathed its last in March 2000. It was a rally without interim corrections of more than 20 percent, lasting an impressive 4,494 trading days! To match that, the current rally still has a long way to go – until February 2035, to be exact.
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The rally was driven at the time by The Four Horsemen, the leading technology funds Microsoft, Intel, Cisco Systems, and Dell. The rally really gained momentum after the introduction of the Netscape browser in 1994. The internet found its way among wide segments of the population. The dot-com rally was born.
Given the societal impact, you could compare the introduction of the Netscape browser with the arrival of ChatGPT. Both were at the forefront of a technological revolution: respectively, the internet and AI.
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Results from the past: just a little longer to go
Interesting is the similarity of the price movement since the launch of both innovations. The development progresses almost identically.
It becomes even more interesting when we consider in which phase the market should currently be. Compared to then, we are now somewhere in April 1998, a somewhat volatile interim phase in the internet revolution. The markets would subsequently prepare for a massive rally lasting another two years. Especially in the final months of that rally, prices exploded, and investors lived in paradise.
A rally by the book
Are we also facing that with AI? Until now, the rally has been going according to plan, you could say. Investors seem to be ignoring the war in the Middle East. It's now all about the corporate earnings. Some expectations are set for this quarter. According to Factset, a profit increase of 13.2 percent is anticipated. It would be the sixth consecutive quarter in which profits rise by double digits.
So far, the quarterly results are generally very strong, not only from tech but also from banks and other sectors. In the explanations of the figures, there is mention of headwinds from currency fluctuations, but the impact of the crisis in the Middle East is scarcely mentioned.
AI investments are driving the economy forward
For the rest of 2026, a further increase in profitability is also expected. Whether that is too optimistic will have to be seen, but do not forget that investments in AI by Big Tech alone seem to amount to 600 billion dollars this year. Not only tech companies, but many suppliers from other sectors are being engaged as well.
And it doesn't stop there. After the pandemic, many companies in the old economy had to draw on years of reserves to protect their margins. However, the demand for their products has been exceeding their existing capacity for some time now. Prices are rising, and so are profits. Orders are increasing everywhere faster than inventories. And indeed, AI is often the driving force.
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Martine Hafkamp is the general director of Fintessa Vermogensbeheer. Fintessa is an independent, specialized asset management firm based in Baarn, and a two-time winner of the Golden Bull. This publication is composed by Fintessa B.V. The information mentioned in this publication is derived from sources that Fintessa B.V. considers reliable and publicly available information. This publication contains investment recommendations, but no investment advice, nor an offer or invitation to buy or sell any financial instrument. Fintessa B.V. cannot guarantee the accuracy and completeness of the mentioned facts, data, opinions, expectations, and outcomes. Fintessa B.V. is an investment firm and operates under a license in accordance with the Financial Supervision Act. Fintessa B.V. is supervised by the Authority for the Financial Markets and De Nederlandsche Bank. For the full Disclaimer, please refer to our website www.fintessa.nl.