Capital investment drives stock market rise; "economic recession" claims are self-defeating

Author: Anthony Pompliano, Founder and CEO of Professional Capital Management; Translation: Shaw, Golden Finance

Over the past two years, predictions of the next economic recession have been endless. Whether it’s tariff tensions, potential inflation risks, or geopolitical conflicts, all parties keep asserting: A financial winter is imminent.

However, in the prediction market, the probability of a recession has just hit a record low. The trading platform Kalshi currently shows that the chance of the U.S. economy contracting is only 17%, down sharply from nearly 40% in March of this year.

Prior to this, the U.S. stock market had already experienced one of the fastest recoveries in history. The S&P 500 has risen 7.5% in the past month, with a total increase of nearly 17% since the market lows at the end of March. Bull Theory pointed out that the Nasdaq, S&P 500, Russell 2000, Dow Jones, as well as individual stocks like Google, Intel, Micron Technology, and SanDisk, have closed higher for six consecutive weeks.

Before everyone started talking about bubbles, Wall Street Journal reporter Gunjan Banerji noted that, the P/E ratio of the S&P 500 has actually decreased by 4% since the beginning of the year.

The stock market is not only expected to deliver annual returns above the average, but the valuations of the underlying companies are also continuing to decline. This fully reflects that, against the backdrop of the U.S. economy accelerating overall growth, publicly listed companies are experiencing significant productivity improvements, with revenue and profits expanding in tandem.

Mike Zaccardi’s data shows that, the median quarter-over-quarter change in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) hit its best level in nearly four years.

However, Citadel recently interpreted that this remarkable market rebound is highly concentrated in just a few stocks. An intuitive data point is: In the past 30 days, only 22% of the stocks in the S&P 500 outperformed the index. This also marks the most extreme market concentration in nearly 30 years.

There are essentially only two profitable paths in the market: either focus on artificial intelligence stocks or hold broad-based index funds. If you have allocated to almost any other industry sector without including index assets, you are likely to underperform the market, or at best, outperform the rapidly rising AI concept stocks.

A clear comparison of the past two years’ returns makes this obvious: The S&P 500 has gained 42% in total, while the S&P 500 excluding AI stocks has only increased by 16% during the same period.

As investors, hindsight-based asset allocation strategies are highly risky. The factors that drove market returns in the past may not determine future sources of gains. Nevertheless, the capital investment scale in AI-related companies has already reached a level that cannot be ignored.

Recent data from a16z shows that, based on nominal GDP, the capital expenditure of tech companies accounts for as much as 55% of total U.S. capital spending.

In comparison, such growth is astonishing: in the 1960s, tech companies’ capital expenditure share was only 15%, and in the 1990s, it was just 40%. This prompts reflection: where does this huge amount of capital come from, and where is it flowing?

Peter Diamandis wrote: “In 2024, global corporate AI investment will reach $252.3 billion, with private equity investments growing 44.5% year-over-year. U.S. private AI investments alone amount to $109.1 billion. Capital always flows toward the most certain tracks.”

Returns generated from capital investment often lag by months or even years. And currently, major companies are heavily investing in AI, which is an undeniable fact. When these companies will start reaping investment dividends is now one of Wall Street’s hottest debates. I personally believe that the ultimate profit scale will far exceed market expectations, but investors must maintain a long-term perspective to seize this wave of gains.

Finally, there’s a widely circulated market adage: “Sell in May and go away.” This saying suggests that stock market returns after May are not worth the risks taken. But data from wealth planning firm Creative Planning’s Peter Mallouk shows: “Historically, the average annualized return from May to October is still 7%, and 72% of these periods have been bullish.”

Every piece of data I see points to the same conclusion: Investors should enter the market and allocate funds, preparing for the continued strength of the bull market.

The market is filled with various noise. Pessimists remain resistant and find it hard to accept this current rebound. But all their criticisms are insignificant. Companies across all industries in the U.S. are working together to lay a solid foundation for economic growth over the next century. From infrastructure and power systems to software ecosystems, everything is undergoing comprehensive upgrades.

Investors who can clearly see this major trend and position themselves accordingly will undoubtedly reap substantial rewards in the coming years.