April 18, 2024
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The artificial intelligence boom generates optimism in the tech sector as stocks rise | Artificial intelligence (AI)

US technology companies started the year in the doldrums, hit by cost overruns from overzealous pandemic hiring sparks and worries about the impact of rising interest rates. Things looked bleak – then along came artificial intelligence (AI).

Since then, technology stocks and the blue-chip S&P 500 index have been beaten by advances in AI generation – led by ChatGPT chatbot – and the promise of a new era of growth for the sector. The S&P 500 is up 18.6% so far in 2023 and the Nasdaq tech composite is up 35.7%. Six months is a long time in a fast moving industry.

Five of the biggest beneficiaries of the US tech renaissance report quarterly results over the next two weeks: Facebook owner Meta, Google Alphabet, Apple, Amazon and Microsoft.

Each has individual factors in their recent stock performance, but the AI ​​frenzy has provided a general lift to the sector. Chipmaker Nvidia, which reported its three-month results in May, is the emblem of the revival – becoming a $1tn company out of demand for its products to provide processing power for the new technology.

Big tech is a “torch-bearer” for the AI ​​boom, says Dan Ives, managing director at US financial company Wedbush Securities, who predicts spending on such ventures could reach $800bn (£625bn) over the next decade.

“Going into the second half of 2023, we see a much broader tech rally ahead as investors grapple with the implications of this $800bn AI spending wave on the horizon and what this means for the software, chip, hardware and technology ecosystem in the year ahead,” he says.

Ives also says that Microsoft, Amazon and Alphabet are benefiting from their cloud computing services – which allow companies to rent out server capacity – as cloud services are being used to train and operate AI generation models, the data-hungry networks that power chatbots and image generators.

“This is seen as the ‘internet moment of 1995’… not the ‘dot bubble of 1999’. We estimate that by 2024 AI could account for up to 8% to 10% of overall IT budgets v [approximately] 1% in 2023,” he says.

Apple's Tim Cook unveiling the firm's augmented reality headset.  The company's revenue is predicted to fall.
Apple’s Tim Cook unveiling the firm’s augmented reality headset. The company’s revenue is predicted to fall. Photo: Joe Pugliese/Apple Inc/Reuters

But some investment professionals urge caution. Hyun Ho Sohn, portfolio manager of Fidelity’s global technology fund, said last week that the technology sector fueled by generational AI is a “very narrow, theme-based market”. Indeed, US tech stocks wobbled on Thursday after investors reacted poorly to the latest results from Tesla and Netflix.

“It’s important to be cautious – or maybe realistic,” he says. “Every tech company seems to be laying the AI ​​angle.”

James Knightley, chief international economist at ING in New York, says the macroeconomic picture for US stocks is tough, thanks to slowing retail sales and contracting industrial production.

“My personal view is that there is not much on the macro side that is driving the rally in stocks. There is a growing belief in the market that risks of a recession are not as high as they were before and while AI and technological advances have the potential to boost economic activity, it is the companies driving this that will reap most of the rewards,” he says.

AI frenzy aside, tech companies are not immune to the broader US (and global) economy, with Apple forecast to post a drop in revenue. Meta, for example, is exposed to macroeconomic conditions, due to its reliance on advertising revenue.

Tony Sycamore, an analyst at online trading platform IG, says the good news from Meta’s AI initiatives, the launch of Threads’ “killer Twitter” and aggressive action on costs has already been reflected in its share price. “The risk of bullish expectations against a 136% rise in the share price is that there is already a lot of good news in the price,” he says.

AI, however, is generating a convincing response to any concern.

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