“Goldilocks Conditions”: How AI Adoption Is Fuelling Stock Market Gains

A microchip in a circuit board powers artificial intelligence.

Sometimes, the market is too hot. Other times, like the last few years, it’s been far too cold. But according to one Wall Street strategist, today’s market could be just right. And it seems these “Goldilocks conditions” are being fuelled by a number of factors. But artificial intelligence (AI) is perhaps the biggest influencer these days.

So, let’s look at what’s fuelling these goldilocks conditions and how Canadian investors can get in on the action.

The “Goldilocks” Effect

The term “Goldilocks Effect” in the context of the stock market refers to an economic environment that is not too hot (overheating and causing inflation) and not too cold (recessionary) but “just right” for growth. This ideal state can foster a favourable climate for stocks to perform well.

The economy is growing at a steady pace, which supports corporate earnings without causing the economy to overheat. Inflation is present but at manageable levels, which can indicate healthy demand without eroding purchasing power or prompting aggressive interest rate hikes from central banks.

Other factors include high employment levels. This means consumers have income to spend, which can drive corporate revenues and economic growth. Consumers feel confident about their financial situation, leading to increased spending and investment.

Therefore, in the near future, companies should start generally performing well, with strong earnings reports that drive stock prices higher. What’s more, there are likely to be more rate cuts, not just in Canada but around the world. As central banks maintain relatively low interest rates, making borrowing cheaper for companies and consumers, this can stimulate investment and spending.

Where AI fits in

Now that there is more consumer and investor confidence, AI stocks have been one of the biggest drivers for growth in the economy. Both in Canada and elsewhere. And this is for a number of reasons.

AI is expected to contribute significantly to the global economy. For instance, the manufacturing industry alone stands to gain an additional US$3.78 trillion by 2035 due to AI-driven improvements in efficiency and productivity. The integration of AI in various sectors, such as financial services and healthcare, is projected to add substantial value, boosting overall economic growth​.

Furthermore, AI tools have been shown to significantly improve productivity across different business functions. For example, support agents using AI can handle 13.8% more customer inquiries per hour, and business professionals can write 59% more business documents per hour. This increased efficiency translates into higher profitability and better financial performance for companies, which, in turn, can drive stock market gains​.

Taking advantage

So, do you want in on the Goldilocks Effect as well as AI? Then there is one stock I would recommend, and that’s Shopify (TSX:SHOP). Shopify stock has demonstrated consistent growth in its revenue and user base, driven by the increasing shift to e-commerce. The company’s ability to scale and adapt to changing market conditions positions it well for future gains.

Furthermore, Shopify stock has been integrating AI and machine learning into its platform to improve merchant services, such as personalized recommendations, fraud detection, and inventory management. This enhances the user experience and operational efficiency, making it more attractive to merchants and investors.

What’s more, Shopify stock continues to expand its global presence, tapping into new markets and increasing its customer base. This global reach helps diversify its revenue streams and reduces dependency on any single market. And despite a recent drop in the share price of its outlook, Shopify stock has maintained robust financial health, with significant cash reserves and manageable debt levels. This financial stability allows it to invest in growth opportunities and weather economic fluctuations. So, if you’re looking for growth in the future, Shopify stock could be just right.

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Fool contributor Amy Legate-Wolfe has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.