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The stock market in 2024 has been defined by one theme: AI.
And not just because people only want to talk about AI, but the market’s performance has hinged on it too.
In a weekly note to clients published Monday, strategists at the BlackRock Investment Institute led by Jean Boivin highlighted the following chart, which shows just how much tech has dominated the market’s performance since 2023.
Since the start of last year, the S&P 500 is up a robust 42%. This return is nothing to scoff at, with the annualized rate of that return standing near 26%, almost triple the index’s average annual gain over time.
But if we isolate the performance of tech stocks, we see a clearer picture emerge.
Over that same period, the S&P 500 Tech index, which houses Nvidia (NVDA), the market’s main character at the moment, as well as Microsoft (MSFT), Apple (AAPL), and two other key AI beneficiaries — Broadcom (AVGO) and AMD (AMD) — is up 100%. (As Jared Blikre flagged last week, however, investors buying the most popular tech ETF have missed out on some of this performance.)
Excluding the tech sector, the S&P 500 is up a respectable, but much closer to historically average, 24% over that period.
“The concentration in US tech stocks is a feature, not a flaw, of the AI theme,” BlackRock wrote.
As the analysts noted, stocks in the tech sector collectively grew their earnings 23% over last year in the first quarter. According to data from FactSet, earnings for the S&P 500 as a whole grew 5.9% over the prior year in Q1.
Over the long run, corporate earnings are the most important driver of stock prices. And with tech companies currently growing their profits at a rate far exceeding the index’s average, this outperformance hardly looks exceptional.
“Strong balance sheets are also a reason we like tech, and we are less concerned about valuation metrics,” BlackRock added.
“Free cash flows — excluding operational costs — as a share of sales are nearly double for tech than for the broader market, and tech has the largest profit margins across sectors, LSEG Datastream data show. Plus, many top tech names are highly profitable and cash-flush, allowing them to fund the buildout of AI infrastructure such as data centers.”
As we highlighted over the weekend, one of the key themes the equity strategy team at JPMorgan flagged coming out of first quarter earnings was an emphasis from corporate management teams on continuing AI investments.
All of this is part of why last week, no fewer than three Wall Street banks raised their price targets for the S&P 500, citing AI enthusiasm as the catalyst.
Of course, this dynamic does not come without potential pitfalls. BlackRock flagged AI investments falling out of favor, regulatory changes, or unexpected action from the Fed as potential risks for AI’s predominance.
Still, the firm maintains an Overweight recommendation on US stocks with an emphasis on AI.
“In a world where mega forces — big structural shifts — drive returns now and in the future,” the firm wrote, “we eye the short- and long-term impacts of AI on earnings.”
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