Artificial Intelligence Drives Optimism and Stock Market Growth in the US
Recent advancements in artificial intelligence (AI) are instilling optimism about the future productivity of businesses and making a significant impact on the stock market.
The S&P 500 index has experienced a 9% surge this year, largely propelled by a handful of major stocks that are at the forefront of the AI revolution following the success of the ChatGPT chatbot.
Microsoft, Google’s parent company Alphabet, Nvidia, Apple, and Meta Platforms are the key players driving the S&P 500’s year-to-date performance, accounting for the entire gain, according to Jessica Rabe, co-founder of DataTrek Research. Approximately 25% to 50% of these gains are attributed to the “buzz around artificial intelligence.”
A recent analysis by Societe Generale focused on 20 stocks that are widely held by AI-related exchange-traded funds, which have seen nearly a 40% increase in assets under management this year.
Removing these AI-related stocks from the S&P 500 would result in a performance reduction of around 10 percentage points, pushing the index into negative territory for the year, as revealed by SocGen’s analysis.
Manish Kabra, head of US equity strategy at SocGen, emphasized that it is the AI-driven stocks that are delivering the strongest returns, making it an attractive secular theme.
The surge in AI developments has analysts excited about the profit potential stemming from new revenue opportunities and productivity enhancements.
Goldman Sachs strategists estimate that generative AI could lead to productivity gains, resulting in S&P 500 companies expanding profit margins by approximately 4 percentage points over a decade following widespread adoption.
The optimism surrounding AI serves as a key support factor for the stock market, which is facing various challenges such as uncertainty over raising the debt ceiling and concerns about a potential economic downturn due to the Federal Reserve’s interest rate hikes.
Jim Reid, a strategist at Deutsche Bank, expressed confidence in AI’s transformative power, stating that “We are strongly of the view that AI will change the world.”
The excitement around AI has contributed to significant gains in certain stocks. For instance, Microsoft shares, the second-largest US company by market value, have risen by 32% this year. The company has made headlines with its partnership with OpenAI, the creator of ChatGPT, and its integration of AI into its Bing search engine.
Nvidia, the fifth-largest US company by market value and a central player in AI with its chips, has witnessed a staggering 110% surge in its stock price this year.
The Global X Robotics & Artificial Intelligence ETF has also experienced a nearly 30% increase in value year-to-date.
Investors will closely monitor developments related to the US debt ceiling, as well as inflation data and corporate earnings, including Nvidia’s results, in the upcoming week.
While megacap stocks have been supported by factors such as declining Treasury yields and their perceived safety in uncertain times, it’s important to note that even transformative technologies are susceptible to price bubbles, as seen in the dotcom era. However, many investors believe that AI is here to stay and not just a passing trend.
King Lip, chief strategist at Baker Avenue Wealth Management in San Francisco, describes AI advancements as a “game changer” and owns shares of Microsoft, Nvidia, and Alphabet, emphasizing the potential for earnings growth resulting from generative AI.
The developments in AI extend beyond a mere trend, and the prospects for its impact on businesses and the stock market remain promising.