The market might be in the early stages of a new bull cycle, even as Fed rate fears linger. Driving the market: a surge of interest in AI stocks and artificial intelligence applications.
"I believe this is a new bull market mostly powered by AI," Joe Fahmy, Zor Capital Managing Director, tells Investor's Business Daily's "IBD Live" show. He says current market indecisiveness is due to the seasonally weak months of August and September, but expects the upside to continue as investors consider how the market has performed since May of this year.
"I've talked about big moves in the markets – they've historically been powered by innovations and inventions that have revolutionized our lives: railroads, airplanes, internet and PCs, smartphones, the list is endless."
"What do all these inventions have in common? They increase productivity," Fahmy says. The next wave of innovation, he says, is being driven by AI stocks.
Surfing Through The Chop With AI Stocks
Despite the AI-driven growth, Fahmy expects some chop for surfers riding the bull market wave – but says the rough ride shouldn't put off investors. "We're gonna have normal pullbacks along the way," says Fahmy. "What kept me positive is we were pulling back on lighter and lighter volume."
But instead of realizing these digestions are normal, investors quickly turned bearish in August despite a lack of action from big institutions controlling the market. "What's amazing is sentiment fell off of a cliff," says Fahmy.
After taking profits into strength in mid-July, Fahmy in late August began accumulating shares in AI stocks. He focused on names with higher relative strength that were presenting strong entry points, like Adobe (ADBE) and Oracle (ORCL). "What kept me bullish was specifically that light-volume pullback where it was not heavy selling from the institutions."
"It was just a normal three, four-week pullback, and everybody got bearish, which is amazing," says Fahmy.
Facing Headwinds From The Fed
The U.S. Federal Reserve's next move could create market headwinds, however.
The Fed raised interest rates in July by a quarter percentage point as it continues to fight inflation. But Fed chair Jerome Powell's focus on the tight labor market and wage growth has spurred speculation the Fed might once again raise rates.
Fahmy says his optimism could shift if Fed hawkishness continues. "[A rate hike] would change my outlook if rates continued much higher."
Still, Fahmy remains optimistic the Fed is close to the end of the hiking cycle. He says the market, driven by AI stocks, has proven resilient and continues to show strength despite a historic cycle of rate hikes from the Fed.
"The market has surpassed everybody's expectations," he says.
