'Bond King' Bill Gross predicts stocks will drop as US and China slowdowns overshadow AI hype

• Bill Gross expects the stock market to slump once the economy cools and saps investor enthusiasm.
• The "Bond King" expects slowdowns in the US and China to dampen the buzz around AI and stocks.
• Several experts no longer anticipate a recession, while others continue to predict a slowdown.

Stocks are set to retreat once two bruising headwinds pummel bullish investors into submission, Bill Gross says.

"Exciting doubles match currently in stock market," the billionaire investor tweeted on Monday. "AI and market momentum vs China/US slowdown and negative curve persisting. I pick the latter."

Gross is known as the "Bond King" as he cofounded fixed-income juggernaut PIMCO and managed its flagship bond fund. Based on his tweet, he believes economic downturns in the US and China, and the inverted yield curve, will overpower the current hype around artificial intelligence and faith in the ongoing market rally, sending stocks downward.

Investors are betting aggressively that AI will supercharge productivity and supersize corporate profits. They've piled into the stocks likely to benefit from a boom, including Nvidia, Microsoft, Alphabet, Tesla, and Meta Platforms.

The tech-stock rally has widened in recent weeks to include more staid companies such as Walmart, up 10% this year, and Lowe's, up 18%. The market's climb also reflects improved economic sentiment; inflation has cooled from a 40-year high of 9.1% to 3% over the last 12 months, paving the way for the Federal Reserve to start cutting interest rates and avoid a recession.

However, China's economy only expanded by 0.8% over the last three months, down from 2.2% in the first quarter. The slowdown surprised analysts who expected the country's lifting of pandemic restrictions would unleash rapid growth.

Alarms are flashing in the US too. The Conference Board's Leading Economic Index fell for a 15th straight month in June, suggesting a contraction is in the cards. Consumer savings, retail spending, and industries such as commercial real estate all appear to be under pressure as well.

Moreover, a negative or inverted yield curve has been a reliable recession indicator for decades. When returns from short-term bonds exceed those from long-term bonds, it signals that investors expect the Fed to meaningfully cut rates, which it typically does to stimulate a beleaguered economy.

Gross' view appears to be that the economy will slump, investors' enthusiasm toward AI and the wider market will falter, and stocks will decline. Other experts including David Rosenberg have issued similar warnings, while the likes of Paul Krugman no longer expect a recession.