After generating its worst performance in more than a decade, the stock market came roaring back in 2023. Each of the major market indexes surged more than 20% from their respective recent lows, leading some market commentators to conclude that we're in the throes of the next bull market (the criteria is disputed).
Yet the persistent specter of inflation, the Federal Reserve Bank's relentless campaign of rising interest rates -- designed to quash rampant inflation -- and concerns regarding a potential recession kept some investors on the sidelines even as the markets rush forward.
Some on Wall Street still expect a recession later this year, but one noted economist said he believes the financial landscape has changed, the Fed's campaign of interest rate hikes is nearly over, and fears regarding a recession are overblown.
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Who is Jeremy Siegel?
Jeremy Siegel is something of a legend in the financial community. He's described as a "world-renowned expert on the economy and financial markets" in his bio at the University of Pennsylvania's Wharton School of Business. This earned him the nickname "The Wizard of Wharton."
Siegel authored the award-winning classic Stocks for the Long Run, which was cited by The Washington Post as one of the 10 best investing books of all time. He received his Ph.D. in Economics from MIT and was ranked the best business school professor by BusinessWeek magazine. Siegel has won "dozens of awards for his research, writing, and teaching."
Siegel currently acts as senior investment strategy advisor for WisdomTree Investments and is a frequent commentator on CNN, NPR, and CNBC, among others.
So when Jeremy Siegel talks, people listen.
A strong economy
In his weekly missive on the economy, Siegel posited that the stock market's strong performance will continue, fueled by a strong economy. While Siegel was fearful the Fed would raise interest rates too far, too fast, he now says, "The Fed is not as overly restrictive as I previously feared." While the failure of several regional banks and an earlier decline in commodity prices did concern him, it appears the worst has passed.
Siegel said he believes the probability of recession is declining and he ranks it at roughly 30%. To back up his theory, he points to the second-quarter gross domestic product (GDP), which, at 2.4%, was far stronger than many had expected. "I don't know any economist who thought it would be that high," Siegel noted. He also cited jobless claims, which remained low in July after a brief spike in June. Siegel also said, "Consumer sentiment is still very strong."
He also praised Fed chairman Jerome Powell's recent stance, which suggested that any future rate hikes would be driven by data, a "welcome development for the markets."
To summarize, Siegel said in his July 31 filing: "All this economic view is good for stocks and earnings. The strength reduces recession possibilities, which is the greatest fear for the markets."
A common thread
One of the common themes driving stocks higher this year is artificial intelligence (AI). Siegel previously noted that while some AI stocks are "slightly overvalued," he cautioned investors that the run may not be over. "Momentum can carry stocks far higher than their fundamental value, and no one can predict how high they might go," he said. He went on to say that the AI revolution is "not a bubble yet."
Siegel used the dot-com bubble to illustrate his point. At that time, he said, "We were getting tremendous valuations from companies that had no earnings." This is in sharp contrast to Nvidia (NVDA +1.67%), the current poster child for AI, which Siegel called a "real, good company."
NASDAQ: NVDA
Key Data Points
Nvidia is well positioned to benefit from the AI boom, as it controls an estimated 95% of the market for graphics processing units (GPUs) used for machine learning applications, according to data compiled by New Street Research. Furthermore, for the second quarter, management forecast revenue growth of 64% year over year and 53% sequentially, driven by strong, accelerating demand for its AI chips.
Multiple ways to profit
Since Siegel is the senior investment strategy advisor for Wisdom Tree Investments, that is as good a place to start as any for those wanting to follow his advice. WisdomTree U.S. Quality Growth Fund (QGRW +1.40%) is the company's best-performing exchange-traded fund so far in 2023, up roughly 41% as of this writing.
A quick look at the fund's top holdings helps illustrate why. Apple, Microsoft, Alphabet, and Nvidia are the fund's top positions, at roughly 12%, 11%, 6%, and 5% of holdings, respectively. Each of these companies has strong ties to AI, and each has far outpaced the overall market gains so far this year.
Those who believe Siegel is right and that the stock market will continue to hit new highs this year can buy shares of these companies individually or simply buy shares in the WisdomTree U.S. Quality Growth Fund. Those looking for a bit more diversity can buy shares in an exchange-traded fund that tracks the S&P 500, including the Vanguard S&P 500 ETF (VOO +1.23%) and the SPDR S&P 500 ETF Trust (SPY +1.21%).
In any case, if Siegel is right, any of these options will likely be profitable.
Editor's note: An earlier version of this story incorrectly identified Jeremy Siegel's financial status. He is not a billionaire.
