NEW YORK (Reuters) – The AI theme that has driven the market for the past few years is facing a key moment when Bellwether Nvidia Corp reported its second quarter results on Wednesday.
Investors are surprised as technology stocks, including many of the AI trade signed stocks, have pointed out some warning signs in the AI industry this month.
This decline has ruled out some of the various technologies and other stocks that have been burning since Chatbot ChatGpt was unleashed enthusiastically about the possibility of AI around three years ago.
A comparable weighted basket of 50 AI-related stocks, tracked by a bespoke investment group, including many of the world's largest tech companies, has soared nearly 170% since the end of 2022 as of Monday.
“AI is an important part of what we're driving current inventory,” said Peter Berezin, Chief Global Strategist at BCA Research.
The significant returns on the number of heavyweight tech stocks exposed to AI this year helped the major equity indexes get high.
Semiconductor giant Nvidia is riding on the position of the dominant AI player last month, becoming the first company to reach a market value of $4 trillion.
More than 30% profits accounted for almost a quarter of the 10.4% year-on-year total revenues for the S&P 500 on Monday, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. More broadly, the 10 top AI plays contribute almost half of the index's year-to-earth returns, according to BCA Research.
While stakes in data and analytics company Palantir Technologies have doubled, other chip makers, including Broadcom and Advanced Micro devices, are also outperforming the broader market at an affordable price.
Early in the reporting period, companies such as Microsoft and Google Parent Alphabet announced significant capital expenditures, as AI supported the outcome.
AI stock enthusiasm extends beyond high-tech and technology-related sectors, including utilities and power equipment companies amid the surge in energy demand that appears to be necessary to promote technology.
Industrial company Ge Vernova and members of the utility sector Constellation Energy and Vistra are one of the non-technology stocks that have made strong profits over the past year that has helped the excitement of AI.
AI enthusiasm has helped to far outperform inventory valuations at historic levels. According to LSEG DataStream, the S&P 500's price-to-earning ratio was 22.4 times the final time, based on expected revenues over the next 12 months. This is close to the highest level in over four years, with a long-term average of around 40% above the 15.9 long-term average.
According to LSEG Datastream, Tech has the heaviest weight in the S&P 500 out of 11 sectors.
“We're a little ahead of the skiing here and there is a risk that some of our short-term expectations won't come to fruition,” BCA's Berezin said.
P/E ratings for both the high-tech sector and the S&P 500 are below the highs reached in the late 1990s and early 2000s.
However, investors point to the increasing presence of the high-tech sector in the market index as an indication that the market is overly dependent on group performance.
According to LSEG Datastream, the tech sector consists of more than a third of the total market value of the S&P 500, not far from the 35% level reached in March 2000.
Meanwhile, the market capitalization of the 10 biggest AI plays, including Nvidia, Broadcom and Microsoft, was $18 trillion, the BCA said in a memo last week. This will reach around 33% of the S&P 500's stock market capitalization, from around 15% in the second half of 2022, according to the BCA.
Market concentration risk is “realistic and rising,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial, in a memo.
“Wednesday's commentary on Nvidia will help set a table on how AI trends will develop at the end of the year. Plus, for a market that is pinned into a small group of very large and influential technology stocks,” says Saglimbene.
(Reporting by Lewis Krauskopf, Additional reporting by Lance Tupper, Editing by Alden Bentley and Nick Zieminski)
