Artificial intelligence gives a real boost to the American stock market

NEW YORK Recent advances in artificial intelligence (AI) are fueling optimism about how businesses can operate more productively in the years to come. They also provide 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 sensation ChatGPT chatbot.

Five stocks Microsoft, Google parent Alphabet, Nvidia, Apple and Meta Platforms have been responsible for all of the S&P 500’s year-to-date performance, said Jessica Rabe, co-founder of DataTrek Research. About 25% to 50% of those gains are due to “buzz around artificial intelligence,” she noted.

READ: AI for Business: Why Businesses Should Adapt Now

A recent Societe Generale analysis focused on 20 stocks widely held by AI-related exchange-traded funds, whose total assets under management have increased by almost 40% this year.

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

“AI-driven stocks are the best performers,” said Manish Kabra, head of US equity strategy at SocGen. “As a secular theme, it sure is appealing.”

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

READ: Boost Your Bottom Line: Harness the Power of Artificial Intelligence for Better Profitability

Goldman Sachs strategists estimate that generative AI could create productivity gains that translate to higher profit margins for S&P 500 companies by about 4 percentage points within a decade of widespread adoption.

Indeed, optimism about AI is a key factor in supporting a stock market facing many headwinds. These include uncertainty that the US Congress will reach an agreement to raise the debt ceiling and avoid a default, and fears that the economy is on the verge of a slowdown, while as the Federal Reserve’s interest rate hikes trickle down to the economy.

“We are convinced that AI will change the world,” Deutsche Bank strategist Jim Reid said in a note titled “Will ChatGPT Prevent the US Recession?”

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

Shares of Nvidia, the fifth-largest US company by market value whose chips are at the heart of the AI ​​excitement, have soared 110% this year.

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

READ: OpenAI develops ChatGPT bots

Next week, investors will be keeping an eye on developments in the US debt ceiling, as well as inflation data and corporate earnings, including results from Nvidia.

Other factors supported megacap stocks. These include a decline in Treasury yields from last year’s highs which has eased worries about tech valuations and investors who see megacaps as a safe play in an uncertain environment.

READ: ChatGPT sparks Silicon Valley’s AI gold rush

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

A BofA Global Research report released on Friday said AI stocks were in a “baby bubble” compared to much larger asset price movements seen in areas such as internet stocks and bitcoin over the past few years. last decades.

Nevertheless, many investors said AI was not a fad.

READ: 3 secrets to mastering the automation and AI revolution

King Lip, chief strategist at Baker Avenue Wealth Management in San Francisco, calls AI developments a “game changer.” His company 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 drive profit growth for these companies.”

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