Stocks rallied yesterday while bonds stayed mostly level in front of next week’s Federal Reserve meeting. For a change, the leaders were the big tech stocks, noticeable laggards over the last four weeks during a period where investors moved toward equities perceived as being cheaper than the high multiple Magnificent Seven.

The pop in the tech names once again reflected interest in generative artificial intelligence (AI). New offerings from Alphabet# and Advanced Micro Devices# rekindled investor spirits. If you listen to the large number of companies developing hardware and software to meet the collective needs of future users, it is likely that the total addressable market for AI will be multiples of what was perceived at the beginning of this year. While there will always be Cassandras out there warning of the evils and possible nefarious uses of artificial intelligence, this rapidly developing technology will be incorporated into virtually everything we use. Just as few saw the impact that smartphones would have on the ways we socialize, communicate, travel, and retrieve data, AI will be an equally powerful revolution. To take advantage of all of AI’s future advantages, we will have to replace virtually all existing desktop and mobile devices with new iterations designed specifically to maximize the intellectual capacity offered by new technologies. Thus, while P/Es today seem high, they may not be based on what lies ahead.

The challenge will be to separate the wheat from the chaff and hype from reality. Here’s what we do know.

1. Generative AI is for real, that’s not hype. The total addressable market is in the hundreds of billions of dollars. We can all identify many of the early leaders like Nvidia#, but rapid change means a different competitive environment. Companies that seem dominant today may not be dominant several years from now. Just look backwards to AOL or Yahoo as examples of early leaders that virtually disappeared overnight.
2. There isn’t a company within the S&P 500 that won’t be telling investors how AI is going to improve the way it does business. I would accept that everyone will incorporate AI features into daily business, but will it make a measurable competitive different in how Procter & Gamble makes or sells paper towels?
3. Perhaps the most important macro focus will be on whether AI improves overall productivity. The development of planes, trains and automobiles clearly made us all more efficient. The development of Facebook and TikTok probably didn’t move the needle much even though both became hugely profitable. AI is likely to improve overall productivity. New products will be developed faster. The key is whether the productivity improvements can offset the negative impact of declining birth rates around the world.

But let’s move back to today. The most important near-term economic question is whether we are headed for recession or a soft landing. What we know is that the trends in place today are for lower inflation and slower growth. If growth slows too much, that’s how we arrive at a recession. Ideally, the pace of deceleration slows materially the closer growth rates get to zero. But we won’t know for sure until we get there.

Today’s employment report offers some clues. The good news was pretty good job growth helped by returning workers in the auto and entertainment industries as strikes ended. The labor participation rate rose, a sign of slack in the labor market despite solid jobs growth. The month-over-month rise in wages of 0.4% was higher than expected although year-over-year growth of 4.0% was in line with forecasts. In sum, today’s numbers support the soft-landing thesis. It also reinforces that the Fed will not only stand pat next week but will indicate no rush whatsoever to start cutting rates. The Fed would be perfectly happy to see the economy stay on its current glide path waiting for inflation to continue to gradually move in the direction of the Fed’s 2% target. Over 40% of net new jobs came from the health care sector.

Today, Nicki Minaj is 41. Kim Basinger turns 70.

James M. Meyer, CFA 610-260-2220

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.