The fear of missing out, or FOMO, has hit a new high.
On May 7, $2.6 trillion of S&P call options were bought, the most ever in one day, driving prices higher. Some market pundits say we are in a bubble, while others say we are still in the early innings of AI productivity gains.
The market agrees with the latter point of view.
As of May 8, we’ve seen new all-time highs in the S&P 500, the NASDAQ Composite, the Nasdaq 100 (QQQ), the Magnificent 7, and semiconductors (the SMH ETF). The Dow Jones is 1.5% from its January high, the equal-weight S&P is only 0.5% from its January high, and the Russell 2000 is 1.5% from its recent all-time high.
AI melt-up is driving market higher
The demand for compute capacity continues to be revised higher.
Demand for chips, power supply, and cooling systems for AI data centers has largely sold out suppliers into 2027. Now we find out that AI agents, the ultimate goal for utilizing AI, use a lot more CPU functionality than that of GPUs, which are the foundation of AI systems due to their blazing speed of crunching data.
Advanced Micro Devices (AMD) is up 20% in a week (+103.5% YTD) on this realization. NVIDIA (NVDA) is now at an all-time high with a valuation of $5.25 trillion.
Related: The next phase of AI spending is already underway
As new contracts are made with suppliers, we’re seeing double-digit increases in stock prices. The sector has become such a big index weight that it’s taking the entire market higher.
Economic outlook remains strong
On the economic front, the April nonfarm payrolls came in much stronger than forecast, despite drops in government payrolls and a surprise drop in manufacturing payrolls.
This has eased concerns over job losses due to AI replacement. In the Michigan survey, we saw falling inflation expectations but also weak consumer sentiment.
The K-shaped economy, where the “haves” are doing really well while the “have-nots” are under increasing budget pressures, continues. But as far as the market is concerned, it’s a weak voice: You can argue that 50% of the S&P is part of the AI trade right now, 36% is tech, and if you take Amazon and Tesla out of the consumer discretionary index, you only have 4%. So, weakness here has minimal impact on the market.
July crude oil is down $5 today on rumors of a near-term settlement with Iran. This has taken interest rates lower by 3 bps across the mid to long US Treasury curve. International interest rates are following. Hopes for a near-term cut in the Fed Funds rates remain weak, but that’s clearly not slowing down market valuations from rising.
It’s an AI market right now, but the overall economy still looks solid. The trend remains positive.
