📈 69% of S&P 500 stocks beating the index - a historic record! Pick the best ones with AI.See top stocks

Artificial intelligence gives real boost to U.S. stock market

Published 05/19/2023, 12:38 PM
Updated 05/19/2023, 06:56 PM
© Reuters. FILE PHOTO: The floor of the the New York Stock Exchange (NYSE) is seen after the close of trading in New York, U.S., March 18, 2020. REUTERS/Lucas Jackson/File Photo
US500
-
MSFT
-
GS
-
DBKGn
-
GOOGL
-
AAPL
-
NVDA
-
GOOG
-
SCGLY
-

By Lewis Krauskopf

NEW YORK (Reuters) - Recent advances in artificial intelligence are fueling optimism over how businesses can operate more productively in the years ahead. They are also providing a big boost to the stock market.

The S&P 500's 9% rally this year has been driven by a handful of the index's biggest stocks, a number of which are at the center of the AI frenzy that has spread in the wake of the chatbot sensation ChatGPT.

Five stocks - Microsoft (NASDAQ:MSFT), Google parent Alphabet (NASDAQ:GOOGL), Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL) and Meta Platforms - are responsible for the S&P 500's entire year-to-date return, said Jessica Rabe, co-founder of DataTrek Research. About 25% to 50% of those gains are owed to "the buzz around artificial intelligence," she noted.

A recent Societe Generale (OTC:SCGLY) analysis zeroed in on 20 stocks widely owned by AI-related exchange-traded funds, whose overall assets under management have grown almost 40% this year.

Removing those stocks from the S&P 500 would reduce the index's performance by roughly 10 percentage points, putting stocks in negative territory for the year, SocGen's analysis showed.

"It's the AI-driven stocks that are getting the strongest returns," said Manish Kabra, head of US equity strategy at SocGen. "As a secular theme, for sure, it's attractive."

The rush of AI developments has analysts licking their lips at the profit potential stemming from new revenue opportunities and productivity improvements.

Goldman Sachs (NYSE:GS) strategists estimate that generative AI could create productivity gains that result in S&P 500 companies expanding profit margins by about 4 percentage points in a decade following widespread adoption.

Indeed, optimism over AI is a key factor supporting a stock market facing numerous headwinds. Those include uncertainty over the U.S. Congress coming to agreement to raise the debt ceiling and avoid a default, and worries the economy may be on the verge of a downturn, as the Federal Reserve's interest rate hikes filter through the economy.

"We are strongly of the view that AI will change the world," Jim Reid, strategist at Deutsche Bank (ETR:DBKGn), said in a note titled, "Will ChatGPT prevent the US recession?"

The AI excitement has helped propel hefty gains for some stocks. For example, shares of Microsoft, the second-largest U.S. company by market value, have climbed 32% this year. The software giant has grabbed headlines with its partnership with ChatGPT creator OpenAI and sprucing up its Bing search engine with AI.

Shares of Nvidia, the fifth-biggest U.S. company by market value whose chips are central in the AI excitement, have soared 110% this year.

The Global X Robotics & Artificial Intelligence ETF has jumped nearly 30% this year.

Investors next week will be keeping an eye on developments regarding the U.S. debt ceiling, as well as inflation data and corporate earnings including results from Nvidia.

Other factors have supported megacap stocks. Those include a decline in Treasury yields from last year's highs that has soothed concerns over tech valuations and investors viewing megacaps as safety plays in an uncertain environment.

At the same time, even the shares of potentially transformative technologies are vulnerable to price bubbles, as history shows. A dotcom stock mania helped markets roar higher in the late 1990s, but a crash followed a few years later, leaving only a handful of internet names standing.

A BofA Global Research report published Friday said AI stocks were in a "baby bubble" in comparison with far larger asset price moves seen in areas such as internet stocks and bitcoin over the last few decades.

Nonetheless, many investors say that AI is no fad.

© Reuters. FILE PHOTO: The floor of the the New York Stock Exchange (NYSE) is seen after the close of trading in New York, U.S., March 18, 2020. REUTERS/Lucas Jackson/File Photo

King Lip, chief strategist at Baker Avenue Wealth Management in San Francisco, calls the developments in AI a "game changer." His firm owns shares of Microsoft, Nvidia and Alphabet.

"It goes beyond the next shiny object," Lip said. "The path is pretty clear on how generative AI can lead to earnings growth for these companies."

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.