What a difference a year makes. In mid-2022, the stock market was in the midst of its worst downturn in more than a decade, with no end in sight.
Fast-forward 12 months, and investors face a rapidly shifting landscape. After bottoming late last year, the major stock market indexes have all come roaring back, gaining more than 20% from their lows and heralding what some economists consider the beginnings of the next bull market.
Helping fuel the rising optimism are the latest advancements in generative artificial intelligence (AI). These next-generation chatbots can create new content from scratch, including composing emails, writing code, or creating images. Estimates about the potential impact on the economy vary. Cathie Wood's Ark Investment Management authored one of the most bullish estimates, suggesting the technology could add $14 trillion to the economy by decade's end.
Top economist Ed Yardeni of Yardeni Research goes further: He believes we're in for a period of economic and stock market growth not seen in nearly 100 years.
Image source: Getty Images.
Who is Ed Yardeni?
Dr. Ed Yardeni is a noted economist and president of Yardeni Research, a consulting firm focusing on economic indicators driving the stock market. According to his Yardeni Research biography, Yardeni has worked for some of the biggest names on Wall Street. He served as chief investment strategist for investing firms Oak Associates, Prudential Equity Group, and Deutsche Bank's U.S. equities division in New York City. He also served as chief economist at CJ Lawrence, the formerly named Prudential-Bache Securities, and EF Hutton.
Most recently, Yardeni predicted the S&P 500's bottom in early October, which turned out to be spot on. Furthermore, in an appearance on CNBC earlier this year, Yardeni raised eyebrows when he said that even though the market had already gained 5%, the S&P 500 would jump another 15%, eclipsing 4,600 by the end of the year.
At the time, many were still calling for a recession this year, so it was an ambitious forecast. Wall Street doesn't doubt him anymore: As of this writing, the index is less than 1% below his then-contrarian call. He recently suggested he might raise his year-end estimate to 4,800.
So, when Yardeni talks, investors listen.
Generative AI created a boost
The debut of ChatGPT late last year highlighted the revolutionary advancements in generative AI and the underlying large language models that power them. The next-generation AI chatbot uses natural language processing to engage in human-like discourse. The system can conduct internet searches, respond to questions, compose original content, summarize, write and debug code, and much more. The potential applications are extensive, with many calling for widespread productivity gains as a result.
Yardeni said in his May note to newsletter subscribers that the debut of generative AI "may be the event that launches the Roaring 2020s." He went on to explain, "If so, then we can spend a lot less time obsessing about what the [Federal Reserve] will do next and focus on how technology is boosting productivity and the standard of living throughout the economy."
The 1920s was an era characterized by the arrival of the consumer-driven economy, which resulted in surging economic growth and soaring stock market returns.
How can investors profit?
The growing excitement about generative AI got a significant boost when Nvidia (NVDA +0.67%) reported results for its fiscal 2024 first quarter (ended April 30). The catalyst wasn't the company's current results but its stunning forecast that captured investor's imaginations. After a year-long slump, Nvidia said it expects second-quarter revenue of $11 billion, which would represent growth of 64% year over year and 53% sequentially.
NASDAQ: NVDA
Key Data Points
CFO Colette Kress left no doubt as to the reason for this robust outlook, which was fueled by "growing demand for generative AI and large language models using [graphics processing units] based on our Nvidia Hopper and Ampere architectures."
Nvidia is the most obvious beneficiary of the current AI boom, making it a logical choice to profit from this secular tailwind. Some investors, however, will be put off by its recent run-up and resulting nosebleed valuation. Nvidia's stock has gained 220% so far this year, pushing its price-to-earnings ratio to an all-time high of roughly 245, with an equally lofty price-to-sales ratio of 45.
Another alternative for those who believe Yardeni is right about the productivity boom and resulting stock market gains is an exchange-traded fund that tracks the S&P 500, including the Vanguard S&P 500 ETF (VOO -0.32%) and the SPDR S&P 500 ETF Trust (SPY -0.30%). These provide exposure to the 500 largest publicly traded companies in the U.S. and act as a proxy for the broader economy. That provides investors with the upside -- without taking on as much risk.
