The stock market rally isn’t over yet, and here are three reasons why.

Adam Parker, founder of Trivariate Research, cites three reasons why the benefits will continue to be positive:

First, financial conditions are relatively easy. Yes, bank lending is down and community banks are struggling, but Parker points out that this is offset by an abundance of private credit. Indeed, over the past 35 years, the Bloomberg Financial Conditions Index has eased only 8%.

Expanding profit margins are another advantage for stocks: Analysts expect profit margins to rise for nearly three-quarters of the top 500 U.S. companies, driven by factors including labor productivity, lower input costs and high prices.

This was evident in the first quarter, when net profit margins improved year-over-year across eight of the 11 sectors in the S&P 500. “It’s not just tech profitability that’s driving index fundamentals — improving profit margins are a macro theme,” said DataTrek’s Nicholas Colas.

Of course, you can’t talk about this rise without mentioning big tech companies and artificial intelligence, and Trivariate’s Parker sees the “AI dream” as the third pillar that will drive the further rise.

At this stage, it’s still difficult to identify AI winners or understand the true extent of how AI will change enterprise productivity. But the dream of ‘growing revenue without adding net jobs’ is so powerful that markets continue to rally on news that might have previously been cause for concern,” Parker says. “Investors are now pricing in the potential for long-term AI-driven revenue growth higher than they did at the start of the year.”

The potential of AI alone could be enough to keep the stock market buoyed. Given the first two factors, Parker doesn’t think the stock market rally is in jeopardy. That could change, however, if there’s a catalyst like tightening monetary conditions or a worsening U.S. economy, or if the July jobs report or the upcoming second-quarter earnings season shows signs of concern.

Parker said he thinks the more likely scenario is that “for the foreseeable future, the market will be in ‘innocent until proven guilty’ mode when it comes to the potential of AI.”

That’s why investors shouldn’t shy away from AI deals, even if they’re a little pricey, he says.
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NVIDIA
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And Apple — one of the three biggest components of the S&P 500 and one of the fastest-growing stocks — is also at risk because concerns about market concentration are misplaced. “Would anyone be running a fund for the next few years and saying they didn’t have exposure to these important trends because valuations didn’t work out? That’s not us.”

DataTrek’s Colas highlights that the S&P 500 is a less volatile way to bet on potential AI winners and losers than other technology-focused investments. He’s a believer in Big Tech, and while he says “Gen AI is a powerful new technology, and the largest companies have the best chance of developing and monetizing it,” he says there’s a valid counterargument: “New technologies tend to create new winners and losers.”

If that’s true, then the S&P 500 is a less volatile investment than:

Invesco QQQ Trust Series I

Chase

Nasdaq 100,

The Magnificent Seven (Google’s parent company Alphabet)
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Amazon
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Apple, Facebook parent company Meta Platforms, Microsoft, Nvidia, Tesla, and

Broadcom accounts for just under half of the exchange-traded fund.

By investing in the S&P 500, investors are joining the crowd that continues to support the index’s rise, which will likely continue to attract more money through passive investing.

After all, investors don’t need to believe the party will go on forever to see that it’s not over yet.

Email Teresa Rivas at teresa.rivas@barrons.com.