Riding the Unstoppable Wave: Market Momentum and the AI Revolution

AI Pushes Stocks Higher: TSLA, NFLX, IBM Earnings in Focus

• Investors are feeling confident—inflation is stabilizing and the market is surging, fueled by AI and better-than-expected earnings reports.
• AI's transformative power elevates tech giants, Microsoft and Meta, reshaping market dynamics.
• Consumer spending remains steady, but investors remain cautious amid potential market shocks and consolidation.

The stock market has been on a relentless rise, displaying the classic "can't stop, won't stop" attitude. On Tuesday, the S&P 500 and Nasdaq Composite added 0.7% and 0.8%, respectively, contributing to what has already been a strong year for investors.

These impressive gains have been fueled by positive individual company news, better-than-expected earnings, and stable inflation indicators. As we await earnings reports from some of the most familiar household names, the momentum feels palpable.

The power of AI

One undeniable trend in the current market is an overwhelming fascination with Artificial Intelligence (AI). Microsoft (MSFT), one of the tech giants at the forefront of AI development, recently unveiled plans to offer new AI products to consumers and businesses for a monthly fee of $30—a premium compared to its least expensive version of Office 365.

Moreover, the company announced a groundbreaking partnership with Meta (META), Facebook's parent company, to release a new version of Meta's AI language called Llama 2. This exciting news alone boosted Microsoft's shares by 4%, contributing to a staggering $100 billion increase in its market cap. Other AI-related stocks also saw an upswing, with shares in Nvidia (NVDA) jumping over 2%.

Earnings season is in full swing, with over 7% of the S&P 500 companies having already reported. Impressively, approximately 80% of these companies have surpassed earnings estimates. Experts predicted a 7.5% decline in profits, but this projection has improved to only a 7% decrease.

However, not all companies managed to beat expectations, as evidenced by Goldman Sachs' report of a 58% drop in income. The decline was attributed to reduced investment banking and advisory fees. Interestingly, some other banks reported surprising strength in their trading revenue, hinting at unexpected developments within the financial sector.

In the automotive industry, Carvana made headlines by reporting earnings ahead of schedule. The company pleasantly surprised investors with better-than-expected revenues and profits. Additionally, Carvana announced a significant debt restructuring plan, aimed at reducing its shorter-term obligations. As a result, the company's shares surged by over 25% in premarket trading, signaling a favorable outlook for the car seller.

Consumers keep spending

Turning our attention to consumer behavior, retail sales for June increased 0.2% increase from May. That figure aligns with the recent monthly reading on the consumer prices index, indicating consumers are maintaining a spending pace consistent with inflation.

This positive news bodes well for the upcoming back-to-school shopping season. Moreover, my observation is that inflation appears to be stabilizing, a sentiment reinforced by a slight rebound in the U.S. dollar. The Federal Reserve is expected to raise interest rates by a quarter of a point next week, further clarifying the interest rate outlook.

In anticipation of market-moving earnings reports, IBM ((BM), Netflix (NFLX) and Tesla (TSLA) are scheduled to release their financial results. Investors are keen to learn if IBM has any notable developments in the AI sector and how the market will respond to such news. For Netflix, the focus will be on subscriber growth, especially after its recent efforts to curb password sharing and encourage paid use of its services. As for Tesla, investors are eager to assess the impact of its strategy to capture greater market share by lowering car prices this year. Additionally, the company's recent deals with other electric vehicle manufacturers to use Tesla charging stations may influence its earnings.

Volatility watch

A key factor to watch closely is market volatility. The VIX, often regarded as a fear gauge, has been trading near 13.30 in premarket, suggesting a prolonged period of consolidation. Some interpret this as a sign of market complacency, while others consider it a potential setup for a market shock. Nonetheless, with inflation stabilizing and earnings largely exceeding expectations so far, the market appears robust for the time being. The upcoming earnings reports may provide more insight into the market's trajectory. As always, stick with your investing plans and focus on long-term goals amid market fluctuations.

The current market continues to impress with its unyielding momentum. AI remains a hot topic, and companies like Microsoft are capitalizing on the trend. Earnings reports have delivered pleasant surprises, especially with the strong showing in the trading revenue of some banks. The automotive sector also displayed positive signs with Carvana's impressive performance. Inflation stability and consumer spending are contributing to market confidence. However, market participants should remain vigilant and adaptable, as uncertainties and potential shocks persist. Stay committed to your investment strategies and objectives to weather any market fluctuations that lie ahead.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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