Exuberance, Fear, and Confusion

The stock market, as measured by the S&P 500 Stock Index, made several new highs, generating much comment during the past quarter.  The exuberance over the rising stock market indices was offset by the fear that Artificial Intelligence (AI) will negatively affect job growth and disrupt the businesses of many well-run and respected companies. This situation is creating confusion among investors whose portfolios were not performing as well as the popular indices.

Exuberance – The advance in the S&P 500 Stock Index was mostly driven by technology companies benefiting from the enormous capital spending by AI-related companies building out their platforms and data centers.  The S&P 500 Stock Index is weighted, and over 40% of the index is now attributed to technology companies. Prices related to earnings for some of the AI-related companies are at historic highs, generating some commentary about an artificial intelligence bubble.

Fear – The advances in AI have created fear that many jobs will be replaced by AI and many businesses will be disrupted or displaced.  The result of this concern has been the unwillingness of many investors to focus on or invest in many well-managed essential companies that are experiencing rising current and forecasted earnings. 

Confusion – The issues described above have created unusual stock market volatility and left many confused, as to how the long- term impact on investment portfolios will be affected.

Conclusion – It is my opinion that both the exuberance and the fear are overblown in a volatile and emotion-driven market.  There is increased risk in some of those securities seen to benefit from artificial intelligence, and there is opportunity in some of those stocks depressed by fear. We will continue to attempt to assess the risks, take advantage of the opportunities, and prevent emotions from affecting our decisions.

This material is for informational purposes only and is not individualized investment advice or a recommendation to buy or sell any security. Opinions are as of the date of this letter and may change. The S&P 500 Stock Index is unmanaged, shown for market context only, and cannot be invested in directly. Index returns do not reflect fees or expenses. Past performance does not guarantee future results. Investing involves risk, including possible loss of principal.