The AI rally

Article #858 by Edward Rizzo - Published Weekly

The S&P 500 index, which is the main benchmark index of the US stockmarket, climbed by almost 15% during the first half of 2024. This ranks among the strongest performances for the opening six months of a year despite interest rates remaining elevated as a series of inflation readings during the first part of the year dampened expectations that the Federal Reserve will quickly embark on monetary policy easing measures.

During the first six months of 2024, the S&P 500 index registered new highs for a total of 31 times with 179 stocks hitting new all-time highs. All sectors within the index ended the first half with positive performances with the exception of real estate. The best performing sector was Technology with a 28% gain in the first half of the year followed by Communication Services with a 26% surge. Since the most recent low in October 2023 following a brief move into correction territory during last summer, the S&P 500 is up 33%.

The Dow Jones Industrial Average index lagged behind the indices that have higher exposures to technology companies. The Dow Jones registered an overall gain of only 4% during the past six months while the Nasdaq Composite climbed 19%.

The stellar returns over recent months in the S&P 500 and NASDAQ indices have largely come from just five of the “megacap” companies, namely Nvidia, Microsoft, Amazon, Meta and Apple. The main driving force was the frenzy over the potential of generative artificial intelligence as Nvidia’s financial performance and updated near-term projections continued to easily surpass expectations. Moreover, the continued resilience of the US economy resulted in ongoing strength in corporate earnings across various economic sectors.

Among these five megacaps, Nvidia’s share price jumped a further 150% during the first six months of 2024 (adding an additional USD1.8 trillion in market value) following the extraordinary rally of almost 240% in 2023. This resulted in Nvidia briefly becoming the largest company in the S&P 500 index as its market capitalisation surpassed USD3 trillion level.

Nvidia has undoubtedly been the ‘talk of the town’ across business and also social circles. While many commentators are opining that this is reminiscent of the dotcom bubble in the late 1990’s, others believe that the company’s upcoming computer chips (Microsoft, Meta Platforms and Amazon feature among Nvidia’s customers) will propel it to further success as it continues to dominate this rapidly emerging technology space. A particular analyst highlighted that Nvidia’s market cap could surpass USD5 trillion during the course of 2025. Following such a meteoric rise (the share price soared nearly 700% in just two years), Nvidia’s share price is undoubtedly prone to significant volatility. Between 20 June and 24 June, Nvidia’s market cap declined by USD600 billion, representing a drop of 13% over 3 days just shortly after surpassing a market cap of USD3 trillion. The share price subsequently recovered a good part of the recent sell-off pushing the company’s market capitalisation back above USD3 trillion.

In the technology sector, although Nvidia registered such strong gains once again, it was not the top performing stock. Super Micro Computer in fact ranks as the best performing company within the technology sector as its share price jumped by over 180%. Other notable performers were Micron Technology (+55%) and CrowdStrike (+51%).

The share price of Microsoft surged 19% in the first half of 2024 as its financial performance surpassed expectations with artificial intelligence boosting demand for its software and cloud services. In recent months, Microsoft also launched its Copilots – digital assistants fuelled by generative AI that help boost productivity.

Amazon became the fifth US company to ever reach a USD2 trillion valuation as its share price climbed by 27% after the company increased its focus on AI innovations and the company continue to register robust growth in its Amazon Web Services (AWS) division, which continued to dominate the cloud computing market.

On its part, Meta Platforms rallied by 42.5% driven by robust advertising revenue, stemming from its dominant social media platforms namely –

Facebook, Instagram, and WhatsApp, buoyed by advancements in AI-powered target advertising and e-commerce integration. The company's cost-cutting measures and improved efficiency also positively impacted profitability and investor sentiment.

Apple was a late beneficiary to the AI rally with the share price only moving higher in recent weeks (+9% since the start of the year) after the company announced a partnership with OpenAI on 10 June, which will support a new feature (“Apple Intelligence”) on iPhones and other devices. AI is likely to drive a new cycle of smartphone and device upgrades which resulted in many analysts projecting a jump in Apple’s financial performances in the years ahead.

Following the surprisingly strong rally over recent months, several investment banks have hiked their 2024 year-end targets for the S&P 500 index. In fact, the strong momentum in the first half augurs well for the next 6 months. During the years when the S&P 500 climbed more than 10% in the first six months, the index subsequently jumped 7.9% in the second half of the year.

One major investment bank recently upgraded its S&P 500 target to 5,600 points for the end of the year (representing upside of 2.6% from current levels) but also articulated an alternative scenario with the benchmark index jumping up to 6,300 points by December 2024. The rationale for this possible 15% rally from current levels would arise from "further mega-cap exceptionalism" as these technology companies continue to surpass expectations. There are many other stock market analysts that have such bullish scenarios for the US equity market on the back of the AI revolution still being in the very early stages.

On the other hand, another renowned US investment bank recently released its mid-year outlook, indicating a challenging environment with their target for the S&P 500 remaining at 4,200 points (which signals a 23% downside from current levels). This bank is concerned about the ability of the mega cap stocks to sustain their earnings growth rates into the second half of the year.

An important event that could impinge on the performance of the S&P 500 index, and result in wide bouts of volatility, is the US election in November with President Biden up against former President Donald Trump.

With respect to the near-term outlook, investors will initially focus on the second-quarter earnings season which is about to commence as this will provide important evidence on company profitability levels. Moreover, signs of easing inflation have bolstered hopes that the Federal Reserve will cut rates as from September. The most recent reading published late last week continued to indicate that price pressures are easing. With the Federal Reserve expected to start cutting interest rates later in the year, bond yields are likely to move lower, which could continue to provide added momentum for the equity market over and above the ongoing AI revolution.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.