Liquidity, AI, and Market Concentration: Why the Rally Still Has Room to Run
Stock gains are likely to continue as long as liquidity remains abundant and a significant portion of investors remain out of the market. Excess liquidity has been a key driver of equity appreciation, and current liquidity levels and prices remain in line with historical correlations.
Economic Indicators Point to Continued Growth Potential
Three main factors suggest there is still room for growth.
Weak Dollar
The Dollar index is in a downtrend, which historically supports rising equities.
Hedge Funds Net Short
Markets are advancing even as hedge funds hold net short positions, leaving room for these players to enter long and fuel further upside.
Low Credit Risk
Credit risk indicators remain at very low levels, supporting a “buy the dip” approach.
Markets Surged to Daily Record Highs
According to Bank of America (BoA), since the April “Liberation Day” crash, markets have surged to daily record highs, largely driven by AI-related stocks. Just ten companies (Mag7 + AVGO + ORCL + PLTR) have contributed to roughly 80% of S&P 500 returns in this period. This extreme market concentration has been reinforced by pro-monopoly U.S. policies, while AI spending – projected to reach $2.9 trillion by 2028 – continues to reshape expectations.
BoA notes that this trend is likely to persist until tech credit spreads begin to widen, which would signal concerns over the sustainability of AI investments and potential overbuilding in the sector.
Key Takeaways
- Stocks are likely to continue to surge.
- Excess liquidity continues to drive equity prices higher.
- The Dollar index is falling, pointing to rising equities.
- Hedge funds hold net short positions.
- Credit risk indicators remain at low levels.
- AI-related stocks bring markets to daily record highs.
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