It\u2019s all about the earnings.<\/p>\n
As stocks sit near record highs and the S&P 500 (^GSPC) caps its best month since November 2020, Wall Street is pointing to earnings, especially within the AI trade, as a key driver of further market gains.<\/p>\n
\u201cIt\u2019s a boom,\u201d said Andrew Graham of Jackson Square Capital. \u201cIt\u2019s really hard for the market to go down when you have double-digit earnings growth,\u201c referring to an expected 15.1% earnings growth for the first quarter.<\/p>\n
The latest scorecard gives reason for optimism. As of late April, 84% of the companies that have reported earnings showed a positive earnings surprise, according to FactSet data.<\/p>\n
With higher corporate earnings, \u201cwe are still riding the rails on the Roaring 2020s Express. Nothing seems to stop or derail this train,\u201d veteran strategist Ed Yardeni said in a client note on Friday.<\/p>\n
Increased capital expenditures on AI from Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Alphabet (GOOG, GOOGL) are helping fuel virtually every corner of the AI trade.<\/p>\n
Even equipment maker Caterpillar (CAT) hit record highs last week amid surging sales for its power and energy engines and industrial turbines for data centers.<\/p>\n
All that spending is also seeping into economic data.<\/p>\n
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<\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\nBusiness investments in the first quarter were the primary driver of real gross domestic product. It contributed more to the 2% GDP expansion than consumer spending, the traditional engine of the economy, according to data from the US Bureau of Economic Analysis.<\/p>\n
With oil above $100 and the Strait of Hormuz still closed amid a US-Iran standoff, AI investment may be one of the key forces holding the economy together.<\/p>\n
\u201cI think we\u2019d be likely in a recession already if not for the AI investment driven boom,\u201d Moody\u2019s Analytics chief economist Mark Zandi told Yahoo Finance on Friday. He noted businesses are also benefiting from tax incentives for investments.<\/p>\n
Still, stock reactions within Big Tech players have been mixed as investors weigh strong results against rising spending, particularly with Meta.<\/p>\n
The social media giant, along with Microsoft and Apple, flagged rising costs for memory chips, which are needed for everything from data centers to laptops.<\/p>\n
\u201cMemory that everyone needs in the technology space is now skyrocketing in price. How long can companies negotiate this? They\u2019ve been doing an amazing job. The answer is not forever, so we can\u2019t get complacent,\u201d Tom Essaye, founder of Sevens Report Research, told Yahoo Finance.<\/p>\n
UBS analysts continue to see stocks higher this year, with a target of 7,500 by the end of 2026, pared in April from 7,600 due to higher energy prices.<\/p>\n<\/p><\/div>\n
Strategists still see an upside to the AI trade but recommend investors diversify beyond megacap tech names.<\/p>\n
\u201cWe would also consider using periods of strength in large-cap tech to rebalance away from concentrated exposure and toward a wider set of AI beneficiaries,\u201d wrote Ulrike Hoffmann-Burchardi, global head of equities at UBS wealth management.<\/p>\n
\u201cWe favor a balanced approach to AI across the enabling, intelligence, and application layers, including semiconductors and chip-making equipment, power and resources, infrastructure,\u201d she wrote.<\/p>\n
Even the beaten-down iShares Expanded Tech-Software Sector ETF (IGV), which rebounded about 5% in April, was added to Fundstrat\u2019s top sector on Friday.<\/p>\n
\u201cAI is a threat to many business models, and the software sector will need to evolve- but the best software companies will dynamically adjust and arguably leverage AI,\u201d Tom Lee wrote on Friday.<\/p>\n
\u201cWe are not calling for a V-shaped recovery for software stocks,\u201d he added. \u201cBut the setup is favorable.\u201d<\/p>\n
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at <\/em>@ines_ferre<\/em><\/a>.<\/em><\/p>\n Click here for the latest technology news that will impact the stock market<\/strong><\/p>\n Read the latest financial and business news from Yahoo Finance<\/strong><\/p>\n<\/p><\/div>\n