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The stock market in 2024 will be defined by one theme: AI.
And not just because people want that conversation about AI, but the performance of the market also depends on it.
In a weekly note to clients published Monday, BlackRock Investment Institute strategists led by Jean Boivin highlighted the following chart, which shows how much technology has dominated the market’s performance since 2023.
Since the beginning of last year, the S&P 500 has risen a solid 42%. This return is nothing to scoff at, as the annualized return is almost 26%, which is almost triple the index’s average annual gain over time.
But if we isolate the performance of technology stocks, we see a clearer picture emerging.
Over the same period, the S&P 500 Tech Index, which includes Nvidia (NVDA), currently the market’s mainstay, as well as Microsoft (MSFT), Apple (AAPL) and two other major AI beneficiaries – Broadcom (AVGO) and AMD (AMD) — is up 100%. (As Jared Blikre pointed out last week, investors buying the most popular tech ETF have missed some of this performance.)
Excluding the technology sector, the S&P 500 is up a respectable, but much closer to the historical average, 24% over that period.
“The concentration in US tech stocks is a feature, not a bug, of the AI theme,” BlackRock wrote.
As the analysts noted, tech sector stocks collectively rose 23% in the first quarter from last year. Earnings for the S&P 500 as a whole rose 5.9% in the first quarter from the previous year, according to data from FactSet.
Over the longer term, corporate profits are the main driver of stock prices. And since tech companies are currently growing earnings at a pace well above the index average, this outperformance hardly seems exceptional.
“Strong balance sheets are also a reason we like technology and worry less about valuation metrics,” BlackRock said.
“Free cash flows – excluding operating costs – as a share of revenue are almost double for technology than for the broader market, and technology has the largest profit margins across all sectors, LSEG Datastream data shows. In addition, many top technology names are highly profitable and cash-flowing, allowing them to finance the buildout of AI infrastructure such as data centers.”
As we highlighted this weekend, one of the key themes that JPMorgan’s equity strategy team emerged from its first-quarter earnings results was corporate management teams’ emphasis on continued AI investments.
All of this is part of why no fewer than three Wall Street banks raised their price targets for the S&P 500 last week, citing AI enthusiasm as the catalyst.
Of course, this dynamic is not without potential pitfalls. BlackRock cited AI investment’s fall from favor, regulatory changes or unexpected Fed action as potential risks to AI’s dominance.
Still, the company maintains an Overweight recommendation on US stocks, with an emphasis on AI.
“In a world where mega forces – major structural shifts – are driving returns now and in the future,” the company wrote, “we look at the short- and long-term effects of AI on earnings.”
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