Here are the takeaways from today’s Morning Brief, which you can register to receive every morning in your mailbox accompanied by:
The stock market in 2024 has been defined by one theme: AI.
And not just because people just want talk on AI, but market performance also depends on it.
Within a week note to customers published MondayStrategists at the BlackRock Investment Institute led by Jean Boivin highlighted the following chart, which shows how technology has dominated market performance since 2023.
Since the start of last year, the S&P 500 is up a solid 42%. This return is not to be overlooked, with an annualized rate of this return close to 26%, almost triple the average annual gain of the index over time.
But if we isolate the performance of technology stocks, we see a clearer picture.
Over this same period, the S&P 500 Tech index, which includes Nvidia (NVDA), THE the main character in the market at the momentas well as Microsoft (MSFT), Apple (AAPL), and two other key beneficiaries of AI: Broadcom (AVGO) and AMD (AMD) — is up 100%. (As Jared Blikre reported last week(However, investors who buy the most popular technology ETFs missed out on some of this performance.)
Excluding the technology sector, the S&P 500 index shows a respectable increase, but much closer to the historical average, of 24% over this period.
“The focus on U.S. tech stocks is a feature, not a flaw, of the AI theme,” BlackRock wrote.
As analysts noted, stocks in the technology sector collectively increased their profits by 23% year-over-year in the first quarter. According to FactSet dataearnings for the S&P 500 as a whole rose 5.9% from a year earlier in the first quarter.
In the long run, corporate profits are the the most important driver of stock prices. And with tech companies currently growing their profits at a rate well above the index average, this outperformance hardly seems exceptional.
“Strong balance sheets are also a reason we like technology, and we are less concerned about valuation metrics,” BlackRock added.
“Free cash flow – excluding operational costs – in terms of sales share is almost double for technology compared to the market as a whole, and technology has the largest profit margins of any sector, data from LSEG Datastream. Additionally, many big tech names are highly profitable and cash-flush, allowing them to finance the construction of AI infrastructure such as data centers.
Like us highlighted this weekendOne of the key themes flagged by JPMorgan’s equity strategy team following the first quarter results was management teams’ focus on continued investment in AI.
All this partly explains why last week, no less than three Wall Street banks raised their price targets for the S&P 500, citing enthusiasm for AI as a catalyst.
Of course, this dynamic is not without potential pitfalls. BlackRock flagged the loss of popularity of AI investing, regulatory changes, or unexpected Fed actions as potential risks to AI’s dominance.
The firm nevertheless maintains an overweight recommendation on US equities, with an emphasis on AI.
“In a world where mega-forces – big structural changes – are determining returns today and in the future,” the company wrote, “we are monitoring the short- and long-term impacts of AI on profits.”
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