When rate cuts meet new highs: Can the "AI bubble theory" not stop the rise of US stocks?

Over the past 5 months, the S&P 500 Index has accumulated a more than 31% increase, marking one of the strongest rebounds in nearly 20 years. As shown in the chart below, this performance is only surpassed by the rebounds during the 2008 financial crisis and the pandemic, which is remarkable. For investors in ETFs tracking major US stock indexes, last week was another fruitful week. This was mainly driven by two factors: market expectations that the Federal Reserve will start a rate cut cycle this week, and strong corporate earnings reports from companies involved in the artificial intelligence (AI) sector, igniting market optimism. It is worth noting that the current market's optimism towards AI is not due to news related to NVIDIA Corporation (NVDA.US), but rather driven by Oracle Corporation's (ORCL.US) earnings report. Oracle Corporation not only announced better-than-expected results but also provided a confident performance guidance, leading to its stock price surging by over 40%. This performance has had a profound impact on the financial markets, even surpassing Elon Musk to become the world's richest individual. Is there a bubble in the current market? Despite many analysts insisting that there is a bubble in the current market, stock prices continue to rise. The chart below compares the current AI trend with historical trends in the railway, telecommunications, and shale oil industries. It may seem like the "bubble" in the AI sector should have burst by now based solely on market performance. However, investment research firm Multiplo Invest believes that the current era is facing a true industrial revolution AI will inject strong momentum into economic growth by increasing productivity. Some investors may think that the current market resembles the tech bubble of the past. In response to this, Multiplo Invest provides a valuable comparison: one of the defining events of the Internet era was the launch of the first Netscape browser. The firm suggests that comparing ChatGPT with Netscape is significant. The chart below compares the performance of the NASDAQ Composite Index after the release of Netscape and the performance of the index after the launch of ChatGPT. From this comparison, it is clear that there is still room for asset prices to rise further. According to Multiplo Invest, investors who manage their portfolios with the belief that there is a market bubble will miss out on more opportunities. Rate cuts driving stock market gains Multiplo Invest states that while time will ultimately reveal whether there is a bubble in the AI sector, one thing is certain now: there is a high probability that the Federal Reserve will initiate rate cuts this week, and notably, the S&P 500 Index is nearing historic highs. This scenario has occurred multiple times in history and is the most noteworthy insight of the week. Data shows that since 1980, there have been 22 instances where "the market is approaching historic highs when the Federal Reserve implements rate cuts." In these 22 scenarios, the S&P 500 Index has seen an average increase of 9.8% in the 12 months after the rate cuts. Furthermore, in all 22 scenarios, the stock market has experienced increases after 12 months. This data further supports Multiplo Invest's positive outlook on major US stock indexes. What is the target level for the S&P 500 Index? Based on multiple valuation factors, Multiplo Invest has consistently reiterated a target level of 7095 points for the S&P 500 Index. However, the above statistics have prompted the firm to consider further: the current S&P 500 Index is around 6600 points, and with a 9.8% increase over the next 12 months, by September 2026, the target level for the index would reach 7247 points. This calculation also confirms Multiplo Invest's optimistic expectations for the market. Potential risks facing bullish views Of course, the market is not without risks. Currently, there is a clear contradictory situation in the market: the US Consumer Price Index (CPI) rose by 0.4% month-on-month in August, pushing the year-on-year inflation rate to 2.9%. It is important to note that this level of inflation is the highest since January this year. Multiplo Invest states that theoretically, now may not be the best time to start rate cuts. However, revisions to employment data by the US Bureau of Labor Statistics show that the labor market performance is weaker than expected, so the factor of inflation not reaching the target may not be enough to prevent the Federal Reserve from implementing rate cuts. In addition, there are still more side effects that may arise from tariff policies that need to be observed. The market also faces other unresolved challenges, such as the auto loan default rate rising to the highest level in the past 14 years. At the same time, risks such as the trend in US debt and market concentration issues still exist. As shown in the chart below, the total market value of the top 10 companies in the US has exceeded the total market value of any single stock market in China, the EU, and Japan. Conclusion Driven by market expectations for the Federal Reserve to cut rates this week, US stocks saw gains again this week. The scenario of "stock indexes approaching historic highs + Federal Reserve rate cuts" has occurred multiple times in history, and each time has had a positive impact on the stock market. Oracle Corporation's stock price surged significantly due to market optimism towards AI, and its founder became the world's richest individual as a result. However, many investors still believe that there is a "bubble" in AI, missing out on the opportunities brought by current asset price increases. Based on the above analysis, Multiplo Invest once again reiterates its buy recommendation for assets tracking major US stock indexes like the S&P 500. However, it is important to note that the investment market never exists in an "absolutely ideal" environment risks always accompany it.