Over the last two weeks, stocks – tech stocks in particular – have been hammered hard. Between July 11 and 25, the S&P 500 slid more than 4%. And the Nasdaq Composite shed nearly 8% in that same timeframe.
But in the past two days, the selling pressure on Wall Street has turned into buying pressure. Now suddenly, stocks are in rebound mode.Â
And we think this rebound has some serious legs behind it.
To understand why, just consider the notable news of the past two days.Â
This stock market rebound started on Thursday, in response to a wave of strong earnings reports from companies like ServiceNow (NOW) and IBM (IBM). Both reported exceptional growth on the back of strengthening – not weakening – AI investment and spending trends.Â
Additionally, stocks received extra firepower from a stronger-than-expected second-quarter GDP report. The data showed that after a sluggish first quarter, the U.S. economy rebounded strongly, growing by an impressive 2.8% – far above expectations of just 2%.
Then, on Friday, stocks continued to rebound on the back of a major inflation report. June’s Personal Consumption Expenditures (PCE) report showed that the overall U.S. inflation rate dropped to just 2.5% in June, quickly closing in on the Federal Reserve’s target. In response, investors increased their rate-cut bets; and now the market sees more than three rate cuts by January 2025.Â
In other words… when you look at why stocks have rebounded over the past two days… you start to see some really promising and durable trends.
Understanding Our Bullish Outlook on Tech StocksÂ
When it comes to the forward path for tech stocks, our bullishness is rooted in four fundamental ideas:
- Earnings are strong because companies are spending billions to build and integrate new AI products and services. We believe that trend should continue because AI adoption at both the enterprise and consumer levels remains low and will only increase over the next few quarters and years.
- Inflation is falling toward the Fed’s 2% target and, indeed, is almost there already. That should continue as well. Business surveys suggest that broadly speaking, companies have stopped hiking prices. Meanwhile, commodity prices – like oil and copper – have been in a freefall over the past several weeks.Â
- The outlook for Fed rate cuts is improving, and we think that will remain the case. With inflation back to nearly 2% and the job market starting to crack, it seems likely that the Fed will cut rates multiple times over the next six months.Â
- The economy is growing at a healthy pace. And with both inflation and interest rates set to fall in the coming months, the U.S. economy should only strengthen going forward.Â
From head to toe, the fundamentals supporting stocks right now are very good. It’s just that simple.Â
When the fundamentals are this strong, weakness in the stock market should be bought, especially when that weakness starts to turn into strength.Â
That’s exactly the setup we have right now.Â
And that means this is the time to back up the truck and buy this dip.Â
The Final Word
But what stocks should you look to buy?Â
We like high-quality AI stocks on this dip. They were at the epicenter of all the recent selling, so they’ll likely be at the epicenter of the coming bounce, too.Â
Think names like Nvidia (NVDA), Super Micro (SMCI) and Arm (ARM). All are down about 10% over the past month. Yet, AI firms are broadly reporting very good earnings, as noted above. And those strong fundamentals will create robust demand for those stocks on this rebound.Â
Now, we aren’t targeting NVDA, SMCI and ARM specifically. Instead, we’re looking at different AI stocks… more under-the-radar picks… that are just as high-quality but with even more potential.Â
Check out the AI stocks we’re considering right now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.
