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Stocks are off to a mostly good, but uneven start this year. YTD, the Dow is up 2.99%; the S&P is off -0.14%; the Nasdaq is down -2.99%, the small-cap Russell 2000 is up 6.64%; and the mid-cap S&P 400 is up 7.82%. The tech-heavy Nasdaq, which led the indexes last year with a 20.4% gain, and the S&P 500, which was up 16.4%, have lagged this year as concerns over AI Capital Expenditures have weighed on tech stocks. Stocks like Microsoft, Alphabet, Amazon, and others have seen sharp drops this year. And the headlines point to increased CapEx as the culprit, with people wondering if those investments will ever pay off. Ironically, many of those very same companies continue to show double-digit top and bottom line growth, and cite increasing AI demand for driving their buildout. So, there's a bit of cognitive dissonance there. But the idea that the AI boom is over, and that companies investing heavily in AI will never see a return, couldn't be further from the truth, in my opinion. First, it's important to keep in mind that we are still in the relatively early stages of the transformational AI boom. I mean, ChatGPT was only released in November of 2022. And that sparked the AI boom. And I believe it has years more to go. To be sure, it will enter different phases along the way. Companies like NVIDIA, for example, are selling AI infrastructure (chips, servers, AI training systems, and more). Those are the ones seeing the biggest benefit right now. Others have to buy these products to build their AI models and tools. Those are the ones seeing the most cost. Then those tools are sold to others to build their products, or used internally to build their own products. Point is, we are in the infrastructure phase right now and it's accelerating. The tools and models phase is in the early innings. And the application and productivity phase has really just begun. And that's where the real broader economic payoff happens. But the winners will multiply as the cycle moves thru its stages. So, I would chalk up the recent volatility in AI names as nothing more than some long overdue profit taking after heady gains. Remember, last year's stellar performance in the S&P, for example, marked the third year in a row of double-digit gains. And I'm expecting this year to be the fourth. In addition to the ongoing AI boom, there's a myriad of reasons why, including tamer inflation reports, the resiliency of the economy and lower interest rates, to name a few. For those who wished they would have taken better advantage of last year's rally, the good news is that this year could be even more spectacular. And that's exactly what I'm expecting. History Repeats Itself Last year saw the S&P 500 gain 16.4%. That was on top of 2024's 23.3%, and 2023's 24.2%. The historic tech boom, led by AI, played a large part in sending stocks soaring. It reminds me of the tech boom in 1995-1999 when the market surged by double-digits each year for 5 long, glorious years in a row, resulting in a 220% increase for the S&P, while plenty of individual stocks were up several hundred percent to several thousand percent. And I believe we could possibly see the same thing again now. Maybe 5 years, or more, of boom times - for similar reasons, and some unique to the present day. Tech Booms: Past And Present (Dot-Com To AI) The tech boom back then saw everybody go nuts for technology stocks, driven by the internet and dot-com companies. It was new and exciting. And the internet was forecast to change the way people shopped, did business, and interacted with each other. The promise was real, as we now know. Today's technology boom is being driven by Artificial Intelligence (AI). And it's forecast to be just as transformative as the personal computer, the internet and the mobile phone. And it's expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives. The AI trade has worked so well for a reason -- because the AI boom is real, and is supported by real earnings, and real growth potential. But there are plenty of other catalysts that make the market outlook even more exciting. Continued . . . | ||||
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| The AI Trade Is Alive And Well Yes, I know, there are some who think AI is in a bubble. Don't believe it. The AI trade is alive and well. And will likely be one of the key drivers for stocks for years to come. A recent comment underscoring the AI trade came from AMD CEO Lisa Su, who characterized the demand for AI as "insatiable," and said her company alone could grow by 35% a year for the next 3-5 years because of that. In fact, she said the AI market is "faster than anything we've seen before." And she predicted the AI data center market could grow to "$1 trillion" by 2030. A resounding outlook for the scale of AI. Here's a few more, by NVIDIA CEO Jensen Huang: "AI is the most powerful technology force of our time." "AI will revolutionize every industry, from healthcare to transportation." "We are at the beginning of a new computing era." Yes, AI stocks have moved a lot. Some are at high valuations. But again, we are still relatively early in the AI revolution. The amount of investment in AI will dwarf that of the dot-com era. In fact, it already has. And the unprecedented spending and innovation is expected to last for years to come. While it transforms the world as we know it, it also has the potential to transform one's portfolio. Inflation And Interest Rates While inflation is still too high, it's been more moderate than the Fed had been worrying about. The last Consumer Price Index (CPI, retail inflation) report showed core inflation (ex-food & energy) at 2.5% y/y, down from 3.3% earlier last year. The Producer Price Index (PPI, wholesale inflation), is at 3.0% y/y, up from last month's 2.6%, but still down from last year's high of 3.7%. And the Personal Consumption Expenditures (PCE) index (the Fed's preferred inflation gauge), came in at 2.8%, down from the previous month's 2.9%, and below last year's high of 3.0%. The easing of inflation, in part, gave the Fed the green light to cut interest rates 3 times last year. And they've maintained their outlook for another rate cut this year. As interest rates continue to fall, you can be sure plenty of money tied up in money markets will find their way back into equities, further supporting stock prices. The Earnings Outlook Is For Growth Let's also not forget that earnings are the main driver of stock prices. Ironically, while everyone was fretting over tariffs last year, the earnings picture never wavered and continues to point to growth. Q3'25 earnings season put in another better-than-expected showing. Q4 earnings season (which is underway), is already outperforming expectations, and is forecasting EPS growth of 12.9%. Q1'26 is forecast at 10.8%. Q2'26 is forecast at 14.1%. Q3'26 is forecast at 11.0%. And Q4'26 is forecast at 13.1%. Wow! And again, earnings are the key driver of stock prices. Small-Caps Are Also On The Rise The bull market rally, now in its fourth year, is broadening. Tech is still a big driver. And will be for years to come. But other industries are breaking out as well. And categories. That includes small-caps. While small-caps lagged the S&P in the first half of the year last year, they outperformed in the second half. And small-caps, along with mid-caps, are leading the indexes in 2026, so far. Last year's rate cuts definitely helped. And will continue to do so. While it's true that all-sized borrowers should see relief with lower interest rates, since small-caps tend to have a larger proportion of debt than their larger counterparts, and often borrow at less favorable terms, the rate cuts should have a sizable impact on small-caps. Additionally, the budget bill that passed last summer, which included additional tax provisions for corporate America, not the least of which is the 100% immediate expensing of capital expenditures, will also have a positive impact. Especially since small-caps are typically in the earlier part of their growth cycle. Those tax provisions should allow them to spend/invest more money, accelerate their growth plans, and get the entire tax benefit in year one. I think we're on the cusp of a small-cap renaissance. But note: that expensing, which should have a sizeable impact on smaller-cap companies, also benefits large-cap companies too – like Microsoft, Alphabet and Amazon mentioned at the top, that have invested significant amounts in their AI and data center buildouts. And they too will get the immediate tax benefit of that, without having to wait 5, 7, 15, and in some cases 39 years. And that too will help fuel the ongoing AI boom. Do What Works So, how do you fully take advantage of the market right now? By implementing tried and true methods that work to find the best stocks. For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 38 years (a 76% win ratio) with an average annual return of nearly 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns. It also killed in 1995 with a 52.6% gain; 1996 with 40.9%; 1997 with 43.9%; 1998 with 19.5%; and 1999 with 45.9%. It was also up in 2000 by 14.3% while the S&P was down. Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true! Those two things will give any investor a huge probability of success and put you well on your way to beating the market. But you're not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once. So, the next step is to get that list down to the best 5-10 stocks that you can buy. Proven Profitable Strategies Picking the best stocks is a lot easier when there's a proven, profitable method to do it. And by concentrating on what has proven to work in the past, you'll have a better idea as to what your probability of success will be now and in the future. Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success. Here are a few of my favorite strategies that have regularly crushed the market year after year. New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 26 years (2000 through 2025), using a 1-week rebalance, the average annual return has been 39.6% vs. the S&P's 8.1%, which is 4.9 x the market. Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 26 years (2000 through 2025), using a 1-week rebalance, the average annual return has been 42.4%, beating the market by 5.2 x the returns. Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 26 years (2000 through 2025), using a 1-week rebalance, the average annual return has been 45.4%, which is 5.6 x the market. The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There's no guesswork involved. Just point and click and start getting into better stocks on your very next trade. Where To Start There's a simple way to add a big performance advantage for your stock-picking success. It's called the Zacks Method for Trading: Home Study Course. With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don't have to attend a single class or seminar. Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more. You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed. You'll get the formulas behind our top-performing strategies suited for a variety of different trading styles. The best of these strategies produced gains up to +98.6% in 2025 while the S&P 500 gained +17.5%.¹ The course will also help you create and test your own stock-picking strategies. Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I've learned over the last 25 years to beat the market. Please note: Copies of the book are limited and your opportunity to get one free ends at midnight tonight, unless we run out of books first. If you're interested, I encourage you to check this out now. Find out more about Zacks Method for Trading: Home Study Course. Thanks and good trading,
Kevin Matras Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course. | ||||
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| ¹ The individual strategies mentioned herein represent only a portion of the ones covered in the course. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or U.S. investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through February 2, 2026. The performance is the equal weighted performance of a hypothetical portfolio consisting of stocks with a Zacks Rank of #1 that was rebalanced monthly from January 1988 through December 2013 and weekly from 12/31/13 through Monday's open on February 2, 2026. For each stock with a Zacks Rank #1 at the beginning of the month, the total return during the month was calculated as the % change in the price of the stock from the closing price of the prior month to the closing price of the current month plus any dividends received during the month. The monthly individual stock returns were then averaged to determine the portfolio return for the month. For each stock with a Zacks Rank #1 at the beginning of the week, the total return during the week was calculated as the % change in the price of the stock from the opening price for the week to the opening price of the next week plus any dividends received during the week. The weekly individual stock returns were then averaged to determine the portfolio return for the week. If no month-end price or week end open price was available for a stock, it was not included in the portfolio return for the month or the week. The monthly and weekly returns were compounded to arrive at the annual returns. The annualized return is the annual return that, had it been achieved in each year or portion of a year, would have compounded to create the total return over the full time period. These returns are based on the list of Zacks Rank #1 Stocks that was available to clients of Zacks as of the beginning of the month, when returns were calculated monthly, or as of the beginning of the week when returns were calculated weekly. These returns are higher than the returns an investor could achieve investing real money in a portfolio of Zacks Rank #1 stocks because the returns of the hypothetical Zacks Rank #1 portfolio exclude a number of costs, including commissions incurred for trading, the average bid ask spread, the price impact of the trading and, prior to 2013, in those months when the end of the month fell on Friday, Saturday or Sunday, the overnight return from the month end close to the open on the next trading day. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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