The recent downturn across equity markets, driven by a reassessment of risk across the technology sector, has most likely run its course, our valuation modeling shows.
Our preferred metric of equity market performance within business cycles—a composite Z-score of the S&P 500 yearly return and its 30-day volatility—implies that the recent market downturn, led by artificial intelligence firms, has reached its end, or is about to.
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Z-scores greater than one have generally indicated that a market downturn is likely. On Sept. 23, we published a note stating that this metric had moved above that level, and a market adjustment soon followed.
Now, the current Z-score of 0.6 standard deviations above neutral suggests that the downturn has played out. Of course, the reset could continue, considering the level of speculation in the crypto complex and the heavy investment in artificial intelligence.
But make no mistake: From an economic point of view, artificial intelligence will bolster productivity and potential growth, which will boost living standards.
The technology’s promise, though, does not insulate businesses from making poor investment decisions. Debt issuance has skyrocketed among the 10 largest hyperscalers, approaching $120 billion, a level that underscores both our optimism around AI, and the real risk that surrounds such significant investments in an emerging technology like AI.
