For the past two weeks, the stock market has been mired in its worst selloff of the year. Despite fantastic earnings from the tech sector, investors are caught in a selling frenzy on fears that the ‘AI Bubble’ is about to pop. But we think this morning’s encouraging GDP numbers should offer a reason for stocks to bounce back in a big way.
Indeed, today’s new data showed that after a sluggish first quarter, the U.S. economy rebounded strongly, growing by an impressive 2.8% – far above expectations of just 2%. At the same time, the official GDP Price Index – a good measure of inflation – rose just 2.3% in the quarter, less than the 2.6% expected by economists and very close to the Fed’s 2% target.
In other words, last quarter, the economy grew more than expected while inflation ran softer than expected.
It was what economists call a ‘Goldilocks’ report. In Q2, the economy was hot enough to sustain good growth yet not enough to reignite inflation.
That’s a perfect balance to strike.
GDP Numbers Support Higher Stock Prices
Now, considering this was such a ‘Goldilocks’ GDP update, it makes little sense for stocks – especially tech stocks – to keep falling.
Indeed, over the past 10 days, tech stocks – as benchmarked by the Nasdaq Composite – have dropped more than 6.5%. That matches their biggest 10-day sell-off since the tech bull market started in late 2022.
Why are stocks in the midst of their worst selloff in nearly two years while the economy is growing at a ‘perfect’ pace?
Well, it’s all fear-based. And the fundamentals don’t support it…
Especially considering that corporate earnings have been very good. Of course, only about 300 of the 3,000 stocks in the Nasdaq Composite have reported earnings so far. But those 300 have reported largely stellar earnings, with revenues climbing nearly 5% and profits rising more than 7%.
With the economy chugging along and corporate profits rising at a healthy pace, the stock market shouldn’t keep falling for much longer.
The Final Word
When it comes to today’s stock market, the fundamentals are just too strong.
They support higher stock prices. And we think that’s exactly what we’re going to get.
Indeed, our technical work suggests the ongoing stock market selloff is quite overdone. It should end soon, both in terms of time and price. And stocks will likely spend the rest of the summer rebounding with vigor.
We think that incoming bounce should be especially pronounced in AI-powered tech stocks.
The investment implication? It’s time to buy the dip in tech.
See what stocks we’re eyeing up right now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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