The Defining Influence of AI on the Stock Market in 2024

In 2024, the stock market has been predominantly shaped by a single theme: Artificial Intelligence (AI). This influence isn’t just in conversations and speculation; it’s visibly reflected in market performance metrics, highlighting a year where technology, particularly AI, has steered market dynamics. A standout chart from BlackRock Investment Institute encapsulates this trend, illustrating the tech sector’s remarkable surge and its overwhelming contribution to the market’s overall gains.

Unprecedented Growth in Tech Stocks

Since the beginning of 2023, the S&P 500 has seen an impressive overall rise of 42%, with an annualized gain nearly tripling the index’s long-term average. However, when dissecting these numbers, the true star performer has been the technology sector. Specifically, the S&P 500 Tech index, which includes pivotal AI players like Nvidia, Microsoft, Apple, Broadcom, and AMD, has doubled in value, recording a staggering 100% increase. This stark contrast highlights how, excluding tech, the S&P 500’s growth would align more closely with historical averages at 24%.

BlackRock analysts describe the concentration of growth in US tech stocks as a fundamental aspect of the AI theme rather than a market anomaly. This sector has not only excelled in market value but has also shown substantial earnings growth. For the first quarter, tech companies collectively reported a 23% increase in earnings over the previous year, significantly outpacing the broader S&P 500’s growth rate of 5.9%.

The Role of Strong Financial Health

One of the underlying strengths of tech companies, particularly those leading in AI, is their robust financial health. BlackRock points out that these companies boast free cash flows — excluding operational costs — that are nearly double those of the broader market. Additionally, tech sectors enjoy the highest profit margins across all sectors, as shown by LSEG Datastream data. These financial advantages enable tech giants to heavily invest in AI infrastructure, such as data centers, without jeopardizing their fiscal stability.

Spotlight on Nvidia and AI Investments

The focus on Nvidia, a leading figure in the AI technology sphere, is particularly telling. Nvidia’s CEO, Jensen Huang, highlighted the ongoing and future commitments to AI during his keynote speech at Computex 2024 in Taipei. His insights reflect a broader industry trend where continuous investment in AI is not just a temporary phase but a long-term strategy. JPMorgan’s equity strategy team also noted a similar emphasis on sustained AI investments across various corporate management teams during the first quarter earnings discussions.

Market Optimism and Potential Risks

This overwhelming optimism toward AI has led several Wall Street banks to revise their price targets for the S&P 500 upwards. However, this buoyant outlook is not without its challenges. BlackRock cautions about potential risks, including AI investments falling out of favor, regulatory changes, or unforeseen actions by the Federal Reserve, all of which could destabilize the current growth trajectory.

Despite these potential pitfalls, BlackRock maintains an Overweight recommendation on US stocks, particularly those with a strong footing in AI. The firm suggests that “mega forces” — significant structural shifts — are likely to drive returns both now and in the future, with AI being a pivotal force.