Is the AI-led rally in US stocks a bubble?

ONE puzzling phenomenon for investors this year is the dichotomy between the equity market and the outlook for the US economy. Many economists have cautioned about the high risk of recession in the US, exacerbated by credit tightening in the regional banking sector.

The large inversion of the yield curve also warned ominously of recessions comparable to the 2000 dotcom bubble and the 2008 global financial crisis.

In our view, the strong performance in the equity market rests upon two important factors: disinflation and a soft landing for the US economy. A notable macro development in 2023 is the precipitous decline in inflation. In many developed economies, inflation peaked around the middle of last year and has since trended downwards.