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US Stock Market Soars in Q2 2023 Amid AI Optimism and Economic Expansion

In the second quarter of 2023, the US stock market maintained its upward trajectory, buoyed by better than anticipated economic expansion and optimism surrounding the future impact of artificial intelligence on earnings growth. This year’s market rally has been notably focused, with returns from ‘the magnificent 7″ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), accounting for more than half of the overall gains.

Investor enthusiasm for artificial intelligence, particularly in relation to natural language processing tools like ChatGPT, propelled the stocks of companies expected to benefit from the future adoption of this technology. While it might be too soon to pick up winners and losers of the AI revolution, companies specializing in chip manufacturing for AI and those with significant access to computing power, cloud storage, and data are likely to benefit from the advancements in this technology. On the other side of the coin, commercial real estate continues to be the most troubling sector as preference to work from home drags down office space valuations.

On the economic front, headline inflation seems to have peaked globally as energy prices have drastically declined in the last 12 months and while core inflation has been stickier than expected, the trend is clearly to the downside. In the US, the Federal Reserve (Fed) refrained from raising rates further in June and suggested two more rate increases in 2023 through its updated economic projections. Still, with slowing down inflation and signs that the labor market might also be cooling down, the Fed’s tightening cycle may be close to an end. In Europe, the economy turned out to be more resilient than expected as the European block avoided the energy shortage and severe recession that were expected in 2023. While there is still elevated geopolitical uncertainty, a strong labour market and sticky inflation gave confidence to the ECB to continue its aggressive tightening path. In Japan, the market hit a multi decade high that was driven by corporate governance reforms and expected shifts in the Japanese economy.