Global stock markets plunged on Sunday evening, with the Dow and NASDAQ Composite expected to drop by single-digit percentages at the opening bell. The Nikkei 225 index fell 12.40% on the international front, the biggest plunge in its history.
Fears Over US Economy Hit Stock Markets
There are several factors driving stocks into the red. The biggest is fear that the US economy is doing worse than previously forecasted. The release of Friday’s jobs numbers confirmed those fears as unemployment unexpectedly jumped. According to the report, the US economy added 114,000 jobs below the expected 175,000.
Before the disappointing numbers, stock markets had been doing quite well. Falling inflation and growing optimism over Fed rate cuts had buoyed optimism. Additionally, the expected impact of artificial intelligence has pushed tech stocks to new heights.
However, the Fed did not cut rates, dashing hopes of a further rally. Additionally, AI profits have not panned out, with Meta (META) reporting losses in its AI division. It signals that this unproven technology is not ready to launch. Some investors now fear it will never be profitable.
All these factors combined have sent investors scrambling to get out fast. They are selling off crypto, which has seen Bitcoin (BTC) fall 11.95% in 24 hours. Investors are also selling off oil, and especially stocks. Many investors are now pouring into bonds, which has caused yields to fall.
How AI-Fueled Bubble Could Soon Recover
The stock market is in full meltdown, in what is being dubbed Black Monday. However, recent results from tech giant Alphabet (GOOG), Meta (META), and Microsoft (MSFT) revealed they spent a combined $40.5 billion on AI in Q2. Most of these companies expect to increase this spending next year.
Most of this spending will likely end up at Nvidia (NVDA) and other AI chip companies, which have seen a significant rise in revenue in recent years. Other analysts point out the recent meltdown is temporary, driven by investor sentiment.
Regarding the fundamentals, household income is rising, while consumer spending has been resilient. However, the recent jobs report cannot be dismissed. It could still be a signal of a looming recession.
Capital Economics argues that the AI bubble could continue until next year, pushing the S&P 500 to 7000 points. They state that AI has not had any transformative impact and is instead following the Gartner Hype Cycle.
How to Invest Amidst Stock Market Meltdown
Consumer spending is responsible for nearly 70% of the US economy and is, in turn, heavily influenced by jobs numbers. If American consumers start getting laid off, they could soon start cutting back on spending.
The one saving grace is that the Fed could start cutting rates as soon as September. There is another jobs report before the Fed’s September 17-18. If unemployment rises, the Fed could implement an even more aggressive cut.
It is also worth noting that the current meltdown aligns with the general market trends. A well-known adage states, “Sell in May and Go Away.” Consequently, it could begin recovering in late October after the rate cuts.
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