4 months ago2 mins

AI’s Driving All The Market’s Gains, But That’s Not Necessarily A Bad Thing

AI’s Driving All The Market’s Gains, But That’s Not Necessarily A Bad Thing

4 months ago2 mins

AI’s Driving All The Market’s Gains, But That’s Not Necessarily A Bad Thing

US stocks are having a good year, and that’s mostly thanks to a small number of companies and a huge amount of AI hype. You can see the very nature of the market’s two-speed advance by comparing the equal-weighted S&P 500 index to the market-cap-weighted S&P 500. Put simply, it shows that the index’s tech-heavy giants are driving its overall gains, with the equal-weighted index trailing its cap-weighted cousin by the widest margin ever, according to Bloomberg.

That narrow breadth may be striking, but it doesn’t necessarily mean that investors should hit the exits. See, there have been a total of 15 years over the past three decades when the equal-weighted S&P 500 trailed the cap-weighted version – in other words, it happens roughly half the time. And of those 15 instances, only three ended in losses 12 months later.

But the narrow breadth is exacerbating concerns among investors. After all, if the AI craze is the only thing propping up the market, then what happens when the hype dies down? You needn’t look too far back in history to remember that the tech sector’s extreme dominance set the stage for the dotcom crash. Of course, some will argue that things are different this time because the handful of tech stocks pushing the market higher today all belong to good companies with what they like to call “assured growth”. If the market’s leaders consisted solely of low-quality companies – similar to what we witnessed in the late 1990s – then matters would be really worrying.

To put that “assured growth” argument into perspective, consider a recent report by Bloomberg Intelligence: it estimates that the generative AI market will expand at a compound annual growth rate of 42%, reaching $1.3 trillion by 2032, from $40 billion last year. And it predicts that Meta, Nvidia, Microsoft, Alphabet, and Amazon will be among the biggest winners from the AI boom. With such impressive growth ahead, don’t expect the AI hype to die down anytime soon…

Generative AI is poised to be a $1.3 trillion market by 2032. Source: Bloomberg Intelligence.
Generative AI is poised to be a $1.3 trillion market by 2032. Source: Bloomberg Intelligence.
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