By Ivan Castano
Bullishness around AI and tech stocks, coupled with expectations for falling rates, could boost U.S. capital markets in the next 12 months, strategists say.
Magnificent 7 stocks remain popular and earnings are strong – factors that have already seen the Nasdaq and S&P 500 gain around 15% and 12%, respectively, as of mid-October. Barring an unexpected shift in monetary policy, deteriorating economic conditions and/or another unforeseen event, the rally could continue into next year.
“The train is not stopping,” said Greg Benhaim, head of product and trading at crypto investor 3iQ, adding that quantitative easing and strong liquidity is encouraging investors to pour billions into a plethora of assets, whether real estate, crypto or Mag 7 stocks.
Benhaim added that the dollar’s weakness is helping lift gold, which is up 51% this year against an 11.7% gain for the S&P 500.
“The recent gold rally is fascinating,” Benhaim continued. “It shows me that there is huge demand for protection against currency debasement, including the U.S. dollar, which has depreciated 10% in the past year.”
The analyst also expects bitcoin, which some call ‘digital gold,’ to benefit from the de-dollarization trend – one that could gain steam if Washington continues to issue bonds, deepening the U.S.’s $38 trillion debt, which some say could depress stocks.
Amid changes in the regulatory environment, which contributed to bitcoin hitting a new all-time high of over $125,000 on October 5, digital currencies are also gaining traction. Beyond crypto ETFs, a slew of companies are starting to create treasuries to hold a myriad of coins. Wedbush analyst Dan Ives’-backed Eightco (established to hold Sam Altman’s identity start-up’s Worldcoin) is a recent, high-profile example.
This growth is extending to the derivatives market – CME Group Crypto futures and options volume exceeded $900B in Q3, reaching an all-time high. In response to client demand for continuous market access, CME Group also recently announced plans to launch 24/7 trading for Cryptocurrency futures and options beginning in early 2026.
Beyond the Mag 7
Deborah Fuhr, managing partner of ETF researcher ETFGI, agrees Wall Street could see more gains amid continued enthusiasm for tech and expectations that the Fed will cut rates in the coming year.
“Many people expect the U.S. will continue to outperform, especially large caps,” she said. However, she is keeping a close eye on Q3 earnings to gauge the market’s health.
“There is concern that AI and tech stocks are at historically high valuations,” she notes. “We will have to see where earnings come to assess reality versus expectation.”
Investors are pouring cash into the Mag 7, a group of tech bellwethers led by AI chip giant Nvidia (NVDA)(up around 36% as of mid-October) and followed by Google (GOOG)(GOOGL), Microsoft (MSFT) and Meta (META), whose shares are all up over 20%. Apple (AAPL), Amazon (AMZN) and Tesla (TSLA), however, have inched up a mere 1% to 3% during the same period, amid views that they are lagging in the AI race.
These tech giants are investing heavily in AI infrastructure, hoping to reap economies of scale from generative/chatbot applications and other enterprise innovations. But some analysts caution the nascent technology may not have the transformative power many expect.
To offset these risks, investors could look at a broader set of technology companies whose growth could benefit from AI but not fully depend on it, Fuhr said. Some of these firms could include cloud-based business software makers such as Palantir (PLTR), Oracle (ORCL), Adobe (ADBE) and Salesforce (CRM), as well as chip and infrastructure providers such as Broadcom (AVGO) and AMD (AMD), on top of Netflix (NFLX).
AI Bubble?
Questions persist around the sustainability of the current AI boom. Fuhr, for example, does not see a near-term risk of an AI bubble similar to the 2000 dot-com crash.
“AI is much bigger than just tech stocks,” she said. “It has the potential to impact almost every industry and how everyone works. It’s not the same as the tech bubble so we don’t see an AI bubble bursting. These companies are also broad tech with different businesses and earnings streams.”
On the other hand, some are concerned about the amount of investment flowing into startups with unproven business models.
“We are in an AI tech bubble that could burst in the next 12 months,” said Matthew Tuttle, founder of Tuttle Capital Management, though he noted it may take longer. One of the first signs of a pop could come when the current investing frenzy starts showing signs of slowing.
“We need to keep an eye on capex,” he added. “As long as people are spending…on this stuff, we are fine, but when it starts to slow down, that’s when it could get scary.”
Value Shares
Eddy Elfenbein, a portfolio strategist at Advisor Shares, is seeking returns elsewhere.
“I am very worried about tech,” he said. “If you are looking for bargains, it’s not the place. But I am optimistic for the market in the next year, especially in defensive and conservative sectors.”
Added Elfenbein: “There are many defensive plays like utilities, consumer staples and healthcare that have not done very well this year and could provide good opportunities for investors.”
As these dynamics continue to evolve, Sector futures and options can be important tools for managing sector-specific risk within the U.S. equity space. Year-to-date average daily volume has reached 26k contracts, up 23% versus 2024.
Third-quarter earnings, which started in mid-October, are expected to show the Mag 7s grew half as fast as in the second quarter, though some say there’s room for surprise beats as Q2 numbers came in higher than expected.
“This season, I think earnings will be fine. But I want to hear guidance on not just numbers, but also companies’ hiring plans and where they see the economy [amid signs of a weak labor market] going,” Elfenbein said.
He will also monitor firms’ spending plans and how they could affect their bottom line. “We want to know how much they are spending to expand production, build new plants, facilities, etc., or if they are pulling back on capex,” which could be a sign that business is slowing, he said.
The ongoing Russia-Ukraine war remains a key market risk, though progress in the Middle East conflict could help lift sentiment.
Meanwhile, there is a renewed focus on U.S.-China trade tensions. On October 10, Trump announced plans to impose a new, 100% additional tariff on Chinese goods because of its rare-earth export restrictions. Shares fell sharply on the news but Wedbush’s Ives encouraged investors buy the dip, noting that tensions are unlikely to escalate to the levels seen earlier this year. He also said tech stocks could gain another 7% by year-end.
While enthusiasm for AI and expectations of falling rates seem to be fueling the current market rally, underlying risks from high valuations and geopolitical tensions remain, meaning this earnings season remains one of many factors on investors’ watch.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
