AI Frenzy Propels Stocks to Monster First Half

The AI fervor powering the stock market shows no sign of cooling down.

Much as in 2023, investors piled into bets in the first half of this year that the artificial intelligence boom is just getting started. They sent Nvidia shares soaring 149%, propelling the graphics-chip maker’s market value above $3 trillion and briefly making it the most valuable company in the world.

Nvidia’s ascent is a big reason the S&P 500 has climbed 14% this year—nearly as much as in last year’s standout first half—even as a series of hot inflation readings damped investors’ hopes that the Federal Reserve would soon begin to cut interest rates.

Investors entered the year thinking the central bank might lower rates some half-dozen times, giving them a cheery view of the path ahead for stocks. But data in the following months showed price pressures were persisting, and the Fed has held off on rate cuts so far.

That shift helped push bond yields higher, with the yield on the benchmark 10-year U.S. Treasury note climbing to 4.342% on Friday from 3.860% at the end of last year. Rising yields tend to weigh on investors’ enthusiasm for taking on the risk inherent in the stock market. But in the first half of 2024, eagerness to own a piece of an AI-charged future won out, pushing the S&P 500 to 31 record closes.

Entering the second half, many investors are feeling good. Corporate profits have been strong, and signs of easing inflation have bolstered hopes that the Fed will cut rates this year. Still, there are reasons the rally could stall. Markets could lose patience if the central bank continues to leave rates unchanged. The election season pitting President Biden against former President Donald Trump could spark volatility, with traders racing to discount the shifting likelihood of policy changes. Elevated valuations could make stocks susceptible to disappointments of any kind.

So far, Nvidia has contributed 30% of the S&P 500’s total return, including dividends, this year through Wednesday, according to S&P Dow Jones Indices. Throw in Google parent Alphabet, Microsoft, Facebook parent Meta Platforms and Amazon.com, and you have accounted for well over half of the broad U.S. stock index’s return.

“Clearly, artificial intelligence has been a big boost to a number of the larger tech companies,” said Holly MacDonald, chief investment officer at Bessemer Trust. “What’s been occurring there is not just buzz around AI, but we’re actually seeing it affecting results.”

Nvidia’s shares jumped 9.3% on May 23 after it unveiled record quarterly results and signaled that the rush into AI wasn’t abating. Microsoft beat analysts’ sales expectations as artificial intelligence boosted demand for its software and cloud services.

Amazon became the fifth U.S. company to reach a $2 trillion valuation after Chief Executive Andy Jassy reoriented the company to focus on AI innovations. Meta recently launched new AI tools for advertisers. Google is rolling out search-engine responses powered by artificial intelligence.

Many investors see the promise of a transformative technology that could fuel leaps in productivity and growth.

“It’s early innings, we think, of a multiyear secular bull phase in AI,” said Mona Mahajan, senior investment strategist at Edward Jones.

Nvidia’s surge has prompted some on Wall Street to draw comparisons with the tech bubble, while many investors point to the company’s blowout profits as evidence the stock’s moves are justified.

Still, signs of potential froth worry some onlookers. May brought a reappearance of the meme-stock trade, which in 2021 transfixed Wall Street and Main Street alike. Shares of GameStop rallied after a social-media account associated with Keith Gill, known as “Roaring Kitty” on YouTube and “DeepF—ingValue” on Reddit, posted a picture of a man leaning forward in his seat.

Bitcoin hit records after regulatory approval of a wave of retail-oriented funds energized cryptocurrency believers. Investors have dashed into junk bonds, suggesting little concern that an economic slowdown will lead to a rise in defaults and bankruptcies.

While artificial intelligence might ultimately affect companies throughout the economy, the recent trade has been more limited. In one indication of the extent to which big tech stocks have been powering the market, an equal-weighted version of the S&P 500 is lagging behind the benchmark index, in which large companies hold more sway than smaller ones, by the most in decades.

The equal-weighted index is up just 4.1% so far this year, underperforming the S&P 500 by 10 percentage points—the biggest gap in the first half of a year in data going back to 1990, according to Dow Jones Market Data.

Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, said technology has become an “all-weather type of investment.” On the one hand, concerns about slowing growth have dissuaded investors from buying into economically cyclical corners of the market. On the other hand, technology stocks are benefiting in a big way from robust spending on artificial intelligence.

“Tech allows you to play defense and offense at the same time,” she said.

A rally that is dependent on a handful of stocks makes some investors nervous. Nvidia, whose stock can be subject to big moves, fell 13% over three trading sessions earlier this month, a potential warning sign for investors.

“We really need the rest of the market to show enough earnings growth where they’ll participate as much in this bull market,” said Ben Pace, chief investment officer at the wealth-management firm Cerity Partners.

Pace sees that happening: His firm earlier this year put money into an exchange-traded fund tracking the equal-weighted version of the S&P 500.

Analysts expect profits from companies in the S&P 500 to grow 11% this year, with every sector except energy and materials showing an increase, according to FactSet. Next year, they anticipate earnings will rise 14%, with the help of all 11 S&P 500 segments.

Another reason for caution: Stocks don’t look cheap. The S&P 500 traded this week at about 21 times its projected earnings over the next 12 months, near its priciest since January 2022, according to FactSet. The 10-year average is about 18 times.

“It already reflects a ton of good news,” Marcelli said. “That makes markets quite sensitive to setbacks.”

Write to Karen Langley at [email protected]