For Hot AI Stocks, 'The Music's Playing'—And Shares Are Rising. Can This Continue?
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Key Takeaways
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Artificial intelligence has once again propelled the stock market to record highs, with investors looking past uncertainty about the Middle East to focus on Big Tech’s AI spending and strong earnings growth.
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The speed of the rally has alarmed some experts worried about over-confident investors chasing momentum trades, and revived concerns about an AI bubble.
The mantra on Wall Street these days: Keep calm and carry on buying tech.
There’s still next to no oil coming out of the Persian Gulf, and U.S.-Iran peace talks have sputtered. Not much progress has been made to end the conflict that’s caused the worst oil supply shock in history. Yet stocks are at record highs, with the S&P 500 up 13% since late March and the tech-heavy Nasdaq trading 18% higher.
You can thank AI for that. Stocks in the tech sector, which is on track to grow earnings about 30% this year according to Alicia Levine, head of investment strategy and equities at BNY Wealth, are powering higher: As of Monday, the PHLX Semiconductor Index (SOX), has advanced in 18 consecutive sessions, rising nearly 50% in that time. Memory stocks that lost their blistering momentum last month have regained it in spades; Sandisk (SNDK), Western Digital (WDC), Micron (MU), and Seagate Technology (STX) are all up between 45% and 70% in the last month.
Why This Matters
Big Tech earnings reports have repeatedly shifted sentiment around AI stocks on Wall Street in recent years. The four largest hyperscalers are all slated to report earnings this week in a possible test of an AI-fueled rally that’s taken stocks to record highs despite a stalemate in the Middle East.
The Magnificent Seven, shares of which languished throughout the first quarter, are also back with a vengeance. Nvidia (NVDA) reclaimed a $5 trillion market capitalization last week. Shares in Nvidia, Alphabet (GOOG), Amazon (AMZN), and Meta (META) are all up more than 20% in the past month. Broadcom (AVGO), not officially in the Mag 7 but carrying a larger market value than Meta and Tesla (TSLA), is up 30%.
“It’s no secret that the economy is going to feel higher oil prices in inflation in the next few months,” Levine told CNBC on Monday. “But the growth is so spectacular on the other side of the equation, which is essentially what the equity market is levered to, and that’s why the equity market is moving higher.”
The fervor of the rally has set off alarm bells, with some commentators wondering whether a risky bubble is filling again. Rather than dipping their toes into the water after March’s slump, investors have jumped back in to the most volatile stocks, according to Jeff DeGraaf, chairman and head of technical research at Renaissance Macro. As a result, high beta stocks—those seen as being more volatile than the broader market—are outperforming low beta by a margin reminiscent of the Dotcom Bubble, and that’s not typical of sustainable rallies, says deGraaf.
“We’re playing because the music’s playing,” he said. “But there’s a lot of questions about it.”
To be sure, some analysts see reason, not irrational exuberance, in the stock market. The recent rally “reflects a squeeze higher in positioning after it was starkly disconnected from the exceptionally strong earnings growth we expected” for the first quarter, wrote Deutsche Bank analysts on Friday. Despite the surge, investor positioning is “only modestly overweight” and “has plenty of room to keep grinding higher,” they said.
Investors have returned to the bubble question repeatedly over the past couple of years as they’ve watched the sums being spent on data centers balloon. The hyperscalers—Microsoft (MSFT), Alphabet, Amazon, Meta, and Oracle (ORCL)—are expected to spend nearly $700 billion on capital expenditures this year, a more than 60% increase from last year.
Skeptics draw parallels between data centers today and the telecommunications infrastructure laid in the 1990s, when telecoms built the backbone of the Internet in anticipation of demand that materialized much more slowly, and with less effect on growth and profits, than expected. Today’s bears warn that the hyperscalers, too, will be left holding the bag if the economics of AI aren’t what they predict.
Bulls point to the hyperscalers’ strong finances and evidence of AI’s financial benefits. Productivity is increasing in “high-AI exposure” industries, according to a recent Morgan Stanley note. There’s also been a step-up in the number of companies offering concrete examples of AI-driven efficiencies. One quarter of S&P 500 companies mentioned at least one quantitative benefit from AI on their earnings calls in the first quarter of this year, up from 13% a year ago.
Wall Street veterans have seen all this before. In the 1990s, struggling companies of all sorts saw their share prices skyrocket after they tacked “.com” onto their names. Some companies that survived the Dotcom Bubble have been slogs for their investors. And yet sometimes things can work out—eventually. Intel (INTC) and Cisco (CSCO) last week both closed at record highs for the first time since 2000.
The balance of AI’s costs and benefits will be in focus on Wednesday, when Alphabet, Microsoft, Amazon, and Meta are all slated to report quarterly results. “This is a ‘show me’ quarter,” said King Lip, chief strategist at BakerAvenue, on CNBC last Friday. “The AI spend has to earn its keep.”
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