- AI fever will carry the bull market even higher, according to Virtus' Joe Terranova.
- Terranova pointed to the strong success of AI stocks this year, which have carried the S&P 500.
Wall Street's excitement for artificial intelligence will carry the bull market in stocks higher – even as the US is set to tip into a recession, according to veteran trader Joe Terranova.
Virtus Investment's chief market strategist pointed to S&P 500's strong performance this year, with the benchmark index officially entering a bull market in early June.
The index has largely been carried by the outperformance of mega-cap tech stocks, which have jumped amid the AI hype sparked by ChatGPT. Though the S&P 500 is up 15% this year, large tech stocks with plans to capitalize on artificial intelligence have more than doubled since January, with Nvidia up 200% and Meta up 129% from the start of 2023.
"If the bulls are going to be defeated, you have to tell me how is it exactly you're going to break the fever that currently exists in mega-cap equities? Because every day it's saving the tape," Terranova said in an interview with CNBC on Thursday. "The script is in place. I've said I think Q3 could be a flat to negative quarter, but on the other side of that, you have the mega-cap put that's in place, and that's going to lead markets to resume the overall positive trend of 2023."
That upward momentum could carry on even in the face of recession, Terranova said, who was skeptical that the US would be able to stick a soft-landing. A downturn is foretold when looking at key recession indicators, he suggested, pointing to the inverted Treasury yield curve, which notched its steepest inversion in over 40 years.
"That's not a sign of growth in the economy," Terranova said. "[Mega-cap tech] is the only place you can find growth."
He forecasted that the Fed would raise interest rates further in the second half of the year, but later pull back interest rates due to recession risks.
"That does not mean that you wash away with an eraser the positive catalyst that is generative AI," he said of his view on stocks.
Experts have been warning of a potential recession over the past year as central bankers raised interest rates aggressively to combat inflation. Though prices are still well above the Fed's 2% inflation target, rates are now at their highest level since 2007 – a level that could easily overtighten the economy into recession, experts warn.
Markets are pricing in a 72% chance the Fed will hike rates another 25 basis points at their next policy meeting, which would lift the fed funds rate to 5.25-5.5%. Meanwhile, the US has a 71% chance of tipping into a downturn by May 2024, according to an estimate from the New York Fed.