Here's Why I'm Buying the Dip
Key Points
AI infrastructure spending remains robust.
An industrial renaissance is underway in the U.S.
Consumers are looking at larger-than-usual tax refunds.
The S&P 500 index is down almost 6% since its late January peak. It had been down more than 9% in late March -- very close to a technical market correction -- before rebounding a bit in recent days on hopes that an end to the war in the Middle East is in sight.
When the war will in fact wind down -- and oil prices will recede below $100 a barrel -- is anyone's guess right now, as both sides in the conflict remain highly unpredictable. That uncertainty has sent major market indexes whipsawing on every comment and social media post by President Donald Trump about the war and any potential end to hostilities.
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As for me, I'm not buying and selling on every new presidential utterance. Instead, I'm just buying the market dip. Here's why.
Image source: Getty Images.
AI infrastructure spending continues apace
First, the massive capital spending by big U.S. firms continues apace. So-called hyperscalers -- large AI and cloud computing firms like Alphabet (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) -- plan to spend at least $625 billion on AI infrastructure this year.
That enormous capital expenditure will be a huge boost to the economy, driving higher revenue and profits for all types of firms. Bridgewater expects AI capex to add 1.4 percentage points to U.S. GDP growth this year and another 1.5 points next year. And there's no evidence that the war in the Middle East will affect those spending plans.
Second, an industrial renaissance is underway in the U.S. It's being driven by several factors, including the reshoring of manufacturing as companies that had moved production abroad are now repatriating some of it. There's also a significant increase in public and private spending on infrastructure.
Much of this domestic rebuilding is being driven by policies set in Washington, including the CHIPS and Science Act of 2022, which earmarks hundreds of billions of dollars to boost domestic semiconductor manufacturing, and the Made in America Jobs Act of 2026, which is working its way through Congress and will facilitate grants to boost manufacturing. There were also tax cuts to incentivize domestic manufacturing in last year's One Big Beautiful Bill tax act.
Tax refunds this year will be larger than usual
Finally, there's the wave of larger-than-average tax returns this tax season. The One Big Beautiful Bill Act cut taxes retroactively (for 2025), which means that many taxpayers who didn't adjust their tax withholding will get larger refunds this year.
Data from the IRS suggests that the average refund so far this year is about $3,570, 11% higher than last year. That should provide a nice boost to consumer spending, which accounts for about two-thirds of economic activity.
And the Fed futures market agrees that slowing economic growth isn't a major risk at the moment. Futures traders now assign a 78% likelihood that the Federal Reserve won't cut rates at all this year. Instead, inflation now looks like the bigger worry for the economy.
The three market tailwinds I outlined above -- massive AI infrastructure spending, an industrial renaissance with growing momentum, and larger tax refunds -- will all remain in place when the Middle East war ends (whenever that may be). So, while geopolitical uncertainty (and a war-related spike in energy prices) are currently barriers to the market heading higher, more fundamental factors are likely to allow asset prices to resume their upward climb once the war winds down.
The Iran war remains a major risk to this scenario, of course. If oil prices resulting from the closure of the Strait of Hormuz remain elevated -- above $100 a barrel for Brent crude -- for many months, they will begin to take a toll on consumer spending. If prices remain high for just a quarter or two, however, they are unlikely to have a noticeable impact on the economy, according to the Fed.
A quick end to the war and a resumption of the market's upward climb -- that's the outlook I'm hoping for, and why I'm buying the dip now.
Matthew Benjamin has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.