Worry turns to hope as Wall Street stocks retreat to record highs

Anxiety has given way to hope on Wall Street.

Stocks are back near records, recovering from a decline that grew on fears that excitement over the artificial-intelligence boom has outstripped potential gains.

Optimism about AI has proven to last for a long time. But other important things also have the potential to benefit. Here’s a look at some of the investment reasons the rally is expected to continue through here:

Stock valuations can be very negative

The stock currently looks overpriced by some criteria, such as the stock price estimates found. Still, even those rates remain below their peaks reached in the 1990s dot-com boom. And stock ratings seem to be expanding in other ways.

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Many Wall Street analysts think the best way to value stocks is to compare their earnings yield – or earnings. Excess yield shows how much investors are compensated for holding a large risk instrument.

One popular version of this metric, known as the “extended corporate yield,” uses the average corporate rates of the S&P 500 from the past 10 years and converts both those earnings and the 10-year Treasury yield.

As of November, it stood at 1.7%. That’s low by historical levels – Pushing higher stock prices has reduced the reward for owning bonds. But it never did and it never did and it actually rose 1.2% in January, thanks to a decline in the 10-year Treasury yield driven by a cool labor market and a resumption of the Federal Reserve-Rate Reserve-Rate Deals-Rate.

Economic growth is supported by income

Finally, stocks are closely linked to the near-term view of consumer spending.

Right now, there are other worries about the economy. Job growth has slowed significantly, and the unemployment rate has risen further – enough to pressure the feds to cut prices.

Attendees at the Albany Job Fair in Latham, New York, on Wednesday, Oct. 2, 2024. (Angus Mordant/Bloomberg)

But investors and economic investors are not worried yet. Many believe that job growth has slowed down significantly due to reduced layoffs. Holiday spending is off to a strong start, and weekly claims remain stubbornly low.

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All of that should be good for companies’ bottom lines. Analysts expect 2026 to be another good year for tech companies in particular, as they spend huge sums on AI infrastructure.

It’s not just about the big tech stocks

Tech companies, including NVIDIA, Microsoft and Meta Platforms, have become the main components of the S & P 500 that any doubt about the future of AI will be the result of the loss of not only technology but also the entire index.

Still, the gains from big tech companies don’t mean other types of stocks are doing poorly. The Russell 2000 Index of small-cap stocks hit a record high last week. The weighted index of the S & P 500 – which gives the same influence to each company regardless of size – is also close to the record, which gives hope that the youth-oriented selloff was dangerous.

“Massive Tech Behemoths dominate the headlines and the entire flow of investment and analysis, but other companies are pulling out,” said Michael Antonelli, Market Stratestiost at Baird.

Inflation Expectations Checked

Another changing concern for investors is that inflation remains well above the Fed’s 4% target, with the central bank’s preferred benchmark sitting at 2.8% in the most recent reading.

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A drop in sticky prices could make it difficult for the Fed to continue cutting interest rates. If the Fed – which may be subject to a major turn from the direction of President Trump – rates, investors can lose confidence in their commitment, sending shock waves through the markets.

Federal Reserve Chairman Jerome Powell. (Kent Nishimura/Getty Images)

Investors, however, are confident that inflationary pressures are melting. Inflation expectations, after jumping earlier in the decade, have been moderated. That can be seen in the spread between yields on federal government bonds and inflation-protected tips, or tips – a gap known on Wall Street as a break – or inflation rate.

Long-term economic growth prospects have improved

Investors also have great reason to feel good. The economy, whatever it does in the next few months, looks to be in the healthiest shape it has been in a decade following the financial crisis of 2008-09.

For years, this fake kept short-term loan rates at zero – the real translation, or price volatility, of rates – in an effort to untangle the moribund economy. Investors and economic investors are worried about the new era of “stagnation of the world” that would harm them financially and make it difficult to achieve.

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Negative costs in the 10-year Treasury note signaled to investors that rates remain at rock bottom levels for the foreseeable future. However, now, those fruits are stable at trerisis levels. Analysts attribute this in part to high fighting and the state’s massive budget deficit but also to prospects for strong economic growth driven by private investment in areas such as AI infrastructure and renewable energy.

“For most investors, you have the highest confidence in investing in general whether it’s equity or income when the real value is good,” said Thanos Bardas, senior portfolio manager and investment grade at Neuberger Berman. “It appears that the economy is operating at or above potential.”