Tech euphoria reigns once again in the USA. Shares associated with artificial intelligence are driving the overall market. Steffen Kunkel, investment expert at Bethmann Bank, advises investors to focus on smart individual stock selection.

It's a bit reminiscent of the Neuer Markt. Back then, it was the Internet that hyped the stock markets; today, it's artificial intelligence (AI). While the topic is not really new, it has gained additional momentum since the launch of ChatGPT. In the noughties, it was said that the World Wide Web would change the world. A good 20 years later, it is clear that it has.

However, most of the companies of that time have not survived, even though the Internet has revolutionized the economy and people's lives. At the turn of the millennium, it was mainly smaller start-ups that dominated the stock markets. Today, on the other hand, it is mainly the large American tech corporations such as Microsoft, Nvidia or Alphabet that are the focus of interest.

The bottom line is that the S&P 500 has risen by a good eight percent since the beginning of the year. That is roughly equivalent to what Wall Street historically achieves on average in an entire year. However, the market breadth is missing this time. The S&P 500 is primarily supported by a few large and highly weighted tech companies. The six largest stocks now account for around 25 percent of the index.

New York Stock Exchanges: Index Funds Not Worthwhile in a Weak Overall Market
Overall, the picture on the New York stock exchanges is much more sobering. The Russell 2000, which also includes a large number of American second-line stocks, has barely moved sideways since the beginning of the year. For investors, this means that in the current environment it is not worth buying the overall market via index funds.
After the restrained start to the year, there could now even be tangible disappointments. Many investors are still betting on a first interest rate cut by the U.S. Federal Reserve before the end of the year. However, they could be caught on the wrong foot.

It is true that the inflation rate in the USA fell further in April to 4.9 percent, according to the Bureau of Labor Statistics. By comparison, a year ago, U.S. inflation was more than eight percent. But at nearly five percent, demonetization is still miles away from the Fed's target of around two percent. Moreover, at 5.5 percent most recently, core inflation, i.e. the rate of inflation excluding prices for energy and food, is still far too high. At this level, an interest rate cut, probably even just a pause in rates, would undermine the credibility of the U.S. central bankers.

The Fed will therefore have little choice but to continue to turn the interest rate screw. It is possible that the markets will see the next interest rate hike as early as June. A combination of further increases in key interest rates and a cooling economy would probably not do the stock markets much good.

Tendency to exaggerate: tech stocks not without risk
It is well known that stock market players tend to exaggerate, both on the downside and on the upside. So it may well be that big tech in the US will continue its run for a while yet. However, it was the sharp rise in interest rates that had put pressure on growth and technology stocks last year. "History may not repeat itself, but it does rhyme" - this bon mot, probably mistakenly attributed to Marc Twain, could prove true once again for American tech companies.

In the coming months, the Western economies will run through a phase of low growth. A mild recession remains likely in the U.S. as well, because inflation won't come down without pain. More cyclically sensitive sectors are already noticing this and lagging in performance. But in the coming weeks and months, it is precisely these stocks that need to be steadily picked up.
Worth a look are the industrial, basic materials and energy stocks that are most sensitive to the weakening economic cycle. Here, there are numerous interesting companies that also benefit from special economic cycles and high subsidies. This is particularly true of the green tech, clean energy, transportation infrastructure, building and security technology, and energy-related construction sectors. They are benefiting in the USA from the Inflation Reduction Act and in Europe from the EU's climate policy targets.

The trend toward reshoring is also likely to support numerous business models in the industrial goods, electrical and basic materials sectors in the coming years. Growth prospects are not limited to big tech.

Source: dasinvestment.com