The AI-Generated Bull Market | Adviser Investments

The AI-Generated Bull Market

AI-generated bull charging forward

AI Dominates the Investment Scene

As Hollywood writers and actors take to the picket lines, artificial intelligence (AI) is having its 15 minutes of fame. To be fair, AI has been at the forefront of tech innovation for decades, with chatbots and self-driving cars among its buzzy commercial applications.

And as an investment theme, it’s certainly not new to us. We own and will continue to own AI stocks as part of our core portfolios—they’ve driven growth for us just as they have for the broader market. One could even argue that the present bull market is a result of investor enthusiasm for AI. As we’ve mentioned in recent weeks, most of the gains in the S&P 500 year-to-date have come from a handful of companies, including Nvidia, Microsoft and Tesla. One thing these mega-techs have in common is that they all create AI-based products and the chips they run on.

Chart compares stock performance of AI companies against the S&P 500.
Note: The AI-company dominated QTUM ETF is handily beating the S&P this year as AI stocks outperform. Dollar values represent returns on hypothetical $100 investment in QTUM ETF and SPY ETF. Sources: Morningstar Direct, Adviser.

Beyond our core portfolios, our private markets offering provides accredited investors with access to earlier-stage AI companies that are not yet publicly traded.

The way we see it, an increasing number of businesses and industries are lining up to adopt AI, boosting efficiency and raising their potential for profitability. The health care, education, financial services, retail and manufacturing industries all stand to benefit from the adoption of AI.

There are caveats we’re watching as well. For instance, government legislation or ESG concerns could possibly slow commercial adoption of generative AI. Another fly in the ointment is questionable accuracy. Like social media and plain vanilla search, ChatGPT and its competitors sometimes spit out replies that are demonstrably false—and acting on bad data opens up numerous legal and reputational risks for businesses.

Our research team is on top of this macro trend and we’re here to talk to you about how it is (or is not) dialed into your specific portfolio plan now and in the future. Let us know what questions you have—we’re here to help.

Secure Act 2.0 Spotlight

When Secure 2.0 was signed into law in December, Americans faced upward of 100 revisions to retirement plans spread over the next decade—it’s a lot to absorb. But as with the topic of AI (mentioned above), we’re here to help break it down.

Here are two timely points that we can talk more about in our next call.

A Smart Tax Strategy for Charitable Giving

First the good news: Secure 2.0 provides a one-time opportunity for qualified individuals (70 1/2 and older) to take a tax-free withdrawal of up to $50,000 from their IRA to make a charitable donation known as a QCD, or qualified charitable distribution. Here’s why this matters: The QCD lowers your taxable income and fulfills your RMD amount for the year.

A donor can make the gift in one tax year only. That could be one $50,000 gift or several smaller gifts up to the $50,000 limit.

There are a few ways to set this up, but we suggest using a charitable gift annuity. This type of annuity establishes the charitable donation in exchange for a partial tax deduction and a fixed stream of income from the charity to the donor or the donor’s spouse. The annuity requires a minimum payout of 5% annually for the donor’s lifetime and it’s taxed as ordinary income.

Charities have offered gift annuities for years, but this is the first time donations can be made directly from retirement accounts. There are other advantages and risks to consider, so let’s talk about this in more detail in our next call.

New Limits for Catch-Up Contributions

Now for the bad news: Catch-up contributions for high earners are about to get more complicated thanks to Secure 2.0.

Under current law, anyone age 50 and up is eligible to make a $7,500 additional contribution to their employer-sponsored retirement plan. That catch-up contribution can be made pretax, effectively lowering your tax liability for the year.

Beginning in 2024, if your W-2 income is greater than $145,000, any catch-up contribution is required to be treated as a Roth contribution. That means the contribution is made with after-tax dollars, so it will not reduce your current taxable income, but it can be withdrawn tax-free in the future.

To be clear, this new rule does not apply to catch-up contributions made to IRAs—only to employer-sponsored retirement plans like 401(k)s and 403(b)s.

This raises an obvious question: What if your company-sponsored plan doesn’t include a Roth option? The new law says that if the plan doesn’t include a Roth catch-up contribution option, then the contribution is not allowed. And if the plan doesn’t allow for Roths, this not only blocks high-wage employees, but it also blocks all employees in the plan from making catch-up contributions regardless of their income.

The upshot? Expect expanded Roth contribution features across employer-sponsored retirement plans. In the meantime, let’s talk about solutions if you think your catch-up contribution will be affected next year.

Adviser Market Update

  • Inflation has cooled, with consumer prices rising a mere 3% in June. A year ago, that figure exceeded 9%. Is the Federal Reserve on track to deliver the elusive “soft landing” (taming inflation without cratering the job market and economy)? It’s looking increasingly possible—though we’re not ready to sound the all-clear on a recession and will continue to maintain a slightly defensive posture in positioning client portfolios.
  • Retail sales rose in June for the third straight month, with spending on electronics, furniture and online shopping driving the momentum. It’s unclear if this trend can continue. Recent data from Citi Research suggests that savings built up during the pandemic are almost depleted. While the strong labor market and wage growth (which is finally beginning to outpace inflation) will keep some wind in consumers’ sails, these dwindling savings plus credit card interest rates could curtail consumption and economic growth.
  • A strike by UPS employees could have major repercussions if an agreement is not reached by the Aug. 1 deadline. It could be the largest labor strike in U.S. history (and the costliest in at least 100 years), according to the Anderson Economic Group. The supply chain could be a key casualty, resulting in higher prices for consumers as products become less available and alternate carriers capitalize by raising shipping rates.

Welcome Ropes Wealth Advisors!

We are excited to share that our partnership with Ropes Wealth Advisors (RWA), which we first announced in May, has been finalized. The merger expands our ability to assist you with trusts, legacy planning, estate settlement and charitable gifting. As we integrate our services this summer, we’ll look for opportunities to better support your needs and goals.

Please note: This update was prepared on Thursday, July 20, 2023, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio.

You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Alternative investments are intended for qualified investors only. Alternative investments such as hedge funds, private credit, private equity, private real estate, and venture capital can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk. Always consult a financial professional before taking specific action.

Alternative investments are speculative and involve a high degree of risk. An investor could lose all or a substantial amount of her or his investment. There is generally no secondary market, nor is one expected to develop and there may be restrictions on transferring fund investments. Alternative investments may be leveraged, and performance may be volatile. Alternative investments may have high fees and expenses that reduce returns and are generally subject to less regulation than securities traded in public markets. The information provided does not constitute an offer to purchase any security or investment or any other advice.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2023 Adviser Investments, LLC. All Rights Reserved.