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With the conflict between Israel and Iran escalating in the Middle East, and inflation proving more difficult to tame than expected domestically, the stock market\u2019s meteoric rise has finally been halted\u2014at least for now. After surging more than 27% between the end of last October and March 28, the S&P 500 has dropped roughly 4% over the past two and a half weeks.<\/p>\n
But this is just a temporary correction in a bull market that\u2019s set to reward investors for nearly a decade, argues James Demmert, founder and chief investment officer of Main Street Research, an investment management and market research firm with $2 billion in assets under management.<\/p>\n
Demmert, who has spent 35 years in the financial industry and authored three books on investing, including his most recent Wall Street Lessons<\/em>, explained that he believes stocks were \u201cdue for a pullback\u201d after rising in nearly a straight line for six months, but that doesn\u2019t change his long-term thesis that AI will drive earnings growth for years to come.\u00a0<\/p>\n \u201cWe are buyers of this stock market correction because while the headlines are scary right now, we believe we have entered a new bull market led by the power of artificial intelligence,\u201d he told Fortune<\/em> via email. \u201cThis new bull market can last for another seven to nine years, as AI is expected to drive significant productivity gains for companies across the board, which will strengthen corporate earnings.\u201d<\/p>\n When it comes to the AI boom, the main question for most professional investors has been clear from the start: Is the near-term hype overly enthusiastic, or is it warranted? And there are still leading voices on both sides of that debate.\u00a0<\/p>\n Just this week, Goldman Sachs\u2019 CEO David Solomon told analysts on an earnings call that AI was a transformational technology and he sees serious opportunity for his company in financing the infrastructure necessary for the AI boom. Companies around the world are repositioning their businesses for AI at an \u201cunprecedented<\/a>\u201d pace, according to Solomon. But Charles Schwab\u2019s CEO Walter Bettinger II told analysts on his company\u2019s earnings call Monday that he believes it\u2019s going to take time for AI to mature. \u201cI know that may not match some of the hype that we hear some speaking of,\u201d he said.<\/p>\n Still, for Demmert, the rise of AI will help drive corporate earnings in the coming years\u2014and investors shouldn\u2019t miss out due to near-term geopolitical issues. \u201cDuring this exciting new business cycle that will be driven by artificial intelligence, investors must avoid being impulsive and reactive to events such as the Mideast conflict and instead institute a strategy that is patient, responsive and opportunistic as these types of events unfold,\u201d he argued.<\/p>\n There are some statistics that back up the cost-cutting<\/a> and productivity enhancing abilities of AI that Demmert believes will lift corporate earnings. AI could increase<\/a> global GDP by $7 trillion over the next decade, according to a study from Goldman Sachs. And McKinsey<\/a> found that generative AI systems could eventually automate<\/a> tasks that currently take up 70% of workers time on the job.<\/p>\n From U.S. financial giants<\/a> to Latin American telecoms<\/a>, companies worldwide are already using AI to reduce labor costs and improve productivity, particularly when it comes to customer service and marketing. But it\u2019s not just major corporations that are taking advantage of the AI boom. Take the example of Batesville Tool & Die, a small manufacturing company in Batesville, Indiana that makes precision metal stamping components. As the Associated Press<\/em> reported<\/a> earlier this year, Batesville Tool & Die struggled to attract talent to their small town for years, leading to serious issues for the company. Then, management decided to invest in a robot that used AI to \u201csee\u201d the world and mimic human workers which ended the talent crunch and increased the company\u2019s productivity.<\/p>\n Demmert and other AI bulls believe stories like this are happening all over the world, and those innovations will serve to boost corporate earnings for years to come. Still, the veteran investor warned that stocks may be in for some pain in the near term, particularly if tensions in the Middle East cascade and \u201cother players in the region\u201d get involved. \u201cThe magnitude of this stock market correction will depend in large part on what\u2019s going on in the Middle East and how things play out from here,\u201d he said, warning that \u201cany escalation of the current tensions would likely cause a further drop in stocks.\u201d<\/p>\n Emily Bowersock Hill, CEO and founding partner of Bowersock Capital Partners, also told Fortune<\/em> via email this week that \u201cgeopolitical risks are unusually elevated and are likely to remain so.\u201d Meaning: Investors should be cautious. But despite the threat of war in the Middle East\u2014as well as higher inflation and fewer rate cuts\u2014she, too, believes the bull market \u201cremains intact.\u201d And Bowersock Hill had a few ideas for investors looking to take advantage of the AI boom as well.\u00a0<\/p>\n \u201cWe like sectors that will benefit from AI but have yet to price in the associated long-term productivity gains, including healthcare and industrials,\u201d she said. \u201cWe also like AI-adjacent names within the technology sector that magnify or enable AI\u2019s use.\u201d<\/p>\n<\/div>\nAn AI-driven earnings boom\u2014with geopolitical risks\u00a0<\/h2>\n
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