Wednesday's Market Minute: So Far, So Good

The bullish story in stocks the past 9 months can be broken into three parts: 1) a peak in inflation that set the stage for softer Fed policy, 2) Chat-GPT's AI breakthrough supporting the outlook for tech companies, and 3) better-than-expected economic data concurrent with disinflation trends.

It's been a pretty powerful cocktail, but it's starting to lose its potency. Economic data continue to beat expectations, which is good, but the signs are building that this stability in the outlook may have the undesirable side effect of keeping inflationary forces elevated. Consumer confidence is roaring, and commodity prices are firming for the first time in a year as China prepares to stimulate their economy. The iShares GSCI commodity fund (GSG) is gunning for a technical breakout from a 14-month downtrend – watch it carefully.

The commodity move wouldn't be a big deal if the market and the Fed were in harmony, but that's not quite the case. The narrowing gap between the Fed's expectation and the market's has been a key part of the rally this year, but once again the market is starting to price in rate-cuts at a faster pace than anything the Fed has told us. This could create some potential conflict for investors if Powell ever finds his hawkish talons again. 

And then there's AI. There's still plenty of reason to think there are major breakthroughs coming that will support tech earnings, but how patient will the market be to see the results? Investors are convinced a product revolution is coming for companies like Microsoft and Google, but it is nowhere to be found in the earnings from last night. Microsoft MSFT described AI-driven earnings growth as "gradual." Nothing about the stock's rise has been gradual. That's not ideal.

The economy's strength is the most important thing, and that's still holding, but the other legs of this bull run are looking wobbly. Single-digit VIX is looking like it might be a pipe dream after all.

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