The stock market is on the verge of a "virtuous investment cycle" that could drive corporate profits to new heights, according to a recent note from Bank of America.
What Happened: Bank of America's strategist Savita Subramanian has suggested that the stock market is about to experience a significant upturn, driven by corporate investments in artificial intelligence (AI). This surge in spending is expected to boost S&P 500 earnings per share, reported Business Insider on Tuesday.
Subramanian has revised her 2024 S&P 500 earnings estimate to $250 per share, up from $235. This would represent a 12% year-over-year increase in corporate profits. For 2025, she has forecasted an S&P 500 earnings per share of $275, indicating a 10% year-over-year growth from her 2024 projection.
"We see a potential virtuous cycle forming from AI investments. Semis and networking are the most obvious beneficiaries, but increased power usage and the physical build-out of data centers will lead to more demand for electrification, utilities, commodities, etc," Subramanian said.
The recent stock market rally has been largely driven by better-than-expected fourth-quarter earnings. Subramanian believes that this trend will continue as AI technologies become more widely adopted, leading to record profits.
She pointed out that the initial investments are being made by mega-cap hyperscalers such as Microsoft Corp (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG), and Meta Platforms Inc (NASDAQ:META). These companies are expected to collectively spend $180 billion on capital expenditures this year, a 27% year-over-year increase.
Subramanian stated, "The $38B YoY increase in capex of represents ~80% of their expected earnings growth YoY – i.e., they're entering a reinvestment cycle."
Why It Matters: Despite ongoing concerns about an AI bubble burst, the Magnificent Seven tech stocks are still considered to be undervalued compared to the wider stock market, according to JPMorgan.
However, the era of the Magnificent Seven's dominance in the stock market may be coming to an end, according to an analyst who popularized the label. The fortunes of these stocks have diverged this year, with their collective dominance over the stock market waning.
Goldman Sachs has also raised concerns about the increasing concentration of the U.S. stock market and the dominant influence of its largest tech stocks, advising investors to adopt a "barbell approach" to diversify their portfolios.
Despite these concerns, some market experts believe that the Magnificent Seven stocks are not in a bubble, citing data points that illustrate the current state of the market.
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