As the conflict between Israel and Iran escalates in the Middle East and inflation at home proves harder to control than expected, the stock market’s meteoric rise has finally stalled — at least for now. After rising more than 27% between the end of October last year and March 28, the S&P 500 is down about 4% over the past two and a half weeks.
But this is just a temporary correction in a bull market that will reward investors for the next nearly decade, argues James Demmert, founder and chief investment officer of Main Street Research, an investment management and market research firm with $2 billion in assets under management.
Demmert, who has worked in the financial sector for 35 years and has written three books on investing, including his most recent Wall Street Lessonsexplained that he believes the stocks were “due for a pullback” after rising in a nearly straight line for six months, but that doesn’t change his long-term thesis that AI will drive earnings growth in the coming years.
“We are buyers of this stock market correction because while the headlines are scary right now, we believe we have entered a new bull market, led by the power of artificial intelligence,” he said. Fortune via email. “This new bull market could continue for another seven to nine years as AI is expected to deliver significant productivity gains for companies across the board, boosting corporate profits.”
AI-powered earnings growth – with geopolitical risks
When it comes to the AI boom, the key question for most professional investors has been clear from the start: Is the near-term hype overly enthusiastic, or is it justified? And there are still leading voices on both sides of that debate.
Just this week, Goldman Sachs CEO David Solomon told analysts on an earnings call that AI was a transformational technology and that he sees serious opportunities for his company in financing the infrastructure needed for the AI boom. According to Solomon, companies around the world are repositioning their businesses for AI at an “unprecedented” pace. But Charles Schwab CEO Walter Bettinger II told analysts during his company’s earnings call Monday that he believes it will take some time for AI to mature. “I know this may not match some of the hype that we’re hearing some people talk about,” he said.
Still, for Demmert, the rise of AI will help boost corporate profits in the coming years – and investors shouldn’t miss out due to near-term geopolitical concerns. “During this exciting new business cycle that will be powered by artificial intelligence, investors should avoid being impulsive and reactive to events such as the conflict in the Middle East and instead adopt a strategy that is patient, responsive and opportunistic as these types of events unfold. unfold,” he says. argued.
There are some statistics that support the cost-saving and productivity-enhancing capabilities of AI that Demmert believes will increase corporate profits. According to a study by Goldman Sachs, AI could increase global GDP by $7 trillion over the next decade. And McKinsey found that generative AI systems could eventually automate tasks that currently take up 70% of employees’ time at work.
From US financial giants to Latin American telecom companies, companies around the world are already using AI to reduce labor costs and improve productivity, especially when it comes to customer service and marketing. But it’s not just big companies that are benefiting from the AI boom. Take the example of Batesville Tool & Die, a small manufacturing company in Batesville, Indiana that makes precision metal stamping parts. Like the Associated press Earlier this year, it was reported that Batesville Tool & Die had struggled for years to attract talent to their small town, leading to serious problems for the company. Management then decided to invest in a robot that used AI to “see” the world and mimic human employees, ending the talent crisis and increasing the company’s productivity.
Demmert and other AI bulls believe these types of stories are happening all over the world, and that these innovations will drive corporate profits for years to come. Still, the veteran investor warned that stocks could be in for some pain in the near term, especially if tensions rise in the Middle East and “other players in the region” become involved. “The extent of this stock market correction will depend largely on what is going on in the Middle East and how things develop from here,” he said, warning that “any escalation of current tensions is likely would cause a further decline in stock prices. .”
Emily Bowersock Hill, CEO and founder of Bowersock Capital Partners, also shared this Fortune via email this week that “geopolitical risks are unusually high and likely to remain so.” Meaning: Investors should be careful. But despite the threat of war in the Middle East – as well as higher inflation and fewer interest rate cuts – she also believes that the bull market ‘remains intact’. And Bowersock Hill had a few ideas for investors looking to benefit from the AI boom as well.
“We like sectors that will benefit from AI but have not yet priced in the associated long-term productivity gains, including healthcare and industrials,” she said. “We also like AI-adjacent names within the technology sector that increase or enable the use of AI.”