AI stocks soar: Is there potential for further gains?

The tech stock rally of 2023 has stretched into 2024, as a few of the largest tech names in the S&P 500 Index have continued to help drive the index’s strong start to the year.¹ AI enthusiasm shows little sign of subsiding, and the promise of continued innovation in the space has captivated investor attention. Advancements like OpenAI’s text-to-video technology, Sora, and Google’s counterpart, Lumiere,² which can create hyper-realistic videos through written prompts, showcase the rapid pace in which AI is evolving. As AI-leaders continue their momentum, this may be a pivotal moment for investors to re-underwrite AI innovation and their exposure to companies leading the charge across industries.

Key points

1. Has AI hype run its course, or will demand for AI innovators and AI beneficiaries continue to accelerate? The first quarter of 2024 closed with strong corporate earnings among leading AI companies, but some investors have grown skeptical around potential for continued strength.
2. AI has emerged as a primary area of focus for companies across a range of industries, yet a degree of concentration remains among well-established technology incumbents.
3. AI may become a driving force behind a shifting labor market. As the technology landscape changes, so do labor markets and the skills required to maintain a competitive advantage within it.

An AI stock rally that defied market expectations

AI optimism gained traction in 2023 and has extended into 2024 with tech companies driving indexes to record highs.³ Riding the waves of AI enthusiasm, these stocks have advanced double-digit percentages at the start of 2024.⁴ Despite strong performance among AI companies, the AI rally still invites its fair share of skeptics that have drawn comparisons to the dot-com bubble of the late 1990s.

To gain better perspective on similarities between these two tech-driven periods, our Systematic investment team contrasted the features of the recent AI boom with the late 90s dot-com bubble. A comparison of the average P/E ratio in Figure 1, reveals key differences between these two technology waves. The nature of companies that are gaining exposure to AI today differ from the speculative valuations during the dot-com bubble. The 1999-2000 period was characterized by declining earnings, extraordinarily high valuations and high levels of volatility. By comparison, AI beneficiaries today are characterized by steadier cash flow and a higher quality of earnings associated with these companies.⁵

In addition, current AI leaders tend to be a smaller and more concentrated set of established tech corporations, as opposed to the new IPOs which drove the dot-com bubble.⁶ Startups building business models in the AI field face a much steeper hurdle than those of the 90s due to the expensive cost of AI infrastructure. AI models require vast amounts of computing power, data, cloud storage and a highly skilled workforce to run efficiently. A website can be created for minimal cost, while the cost of running a single large language model (“LLM”) can incur expenses of $10 million USD or more.⁷ This creates a barrier of entry and is a primary reason concentration remains among incumbent technology firms leading AI innovations.

Identifying AI beneficiaries

In 2023, total mentions of AI-related keywords increased more than three times over the course of the year, as seen in Figure 2 below. Simultaneously, the number of companies outside of the tech universe mentioning AI keywords at least once over the same period less than doubled, as seen in Figure 3. Though AI is picking up momentum collectively, this illustrates the previously mentioned concentration among well-established technology incumbents.

At a slightly slower pace, AI enthusiasm is continuing to gain traction outside of the tech sector, in industries like commercial services, financial services, health care, media and retail. Together, these industries account for a third of total AI mentions in 2023 and have exhibited a 250% spike in mentions since the end of 2022.⁸ Using this information to assess which businesses are prioritizing AI and leveraging the technology to complement their capabilities may be a crucial step in positioning portfolios for potential outsized gains among the next big technology disruptors.

Preparing for a landscape shift

Since the industrial revolution, technological innovation has stoked fears around its potential to gradually replace labor. AI is no exception. Our analysis of labor markets and hiring trends reveals a potentially more promising story of new opportunities emerging amid vast change.

While AI has been cited for a marginal amount of job cuts since May 2023, it has simultaneously created roughly 3.5 million job postings since 2020, and nearly 5 million job postings since 2013 (as shown in Figure 4). AI skills are quickly becoming highly sought after across a range of industries. This marks a significant turning point in labor markets, where our future workforce will potentially be required to possess a base-level of AI-related skills to remain competitive and keep pace with rapid shifts in technology.

Positioning portfolios for the rise of industry 4.0

Research and development in the AI space started nearly 80 years ago,⁹ however, the recent market rally and AI trends observed in 2023 indicate that the technology is just now starting to capture investor interest, as it matures from an elusive idea into a tangible reality. With the rise of the AI-focused research firm, OpenAI, and notable strides in innovations from mega-cap technology businesses,¹⁰ the AI market is poised to grow to an estimated $1.3 trillion USD over the next ten years.¹¹ Powerful AI technologies formerly confined to the world of academia have been democratized and repackaged as for-profit business models available for broader public use and now make up an estimated $40 billion USD.¹² This newfound accessibility presents a potentially compelling opportunity for investors to capitalize on innovators and beneficiaries that are emerging in the space.

We believe AI is a transformative technology that is bound to have far-reaching and long-lasting impact on businesses across nearly every industry. In acknowledgment of what we believe is the inevitable change that is set to take place as the AI revolution unfolds, investors may consider positioning their portfolios for differentiated returns centered around the AI theme.

Any opinions or forecasts represent an assessment of the market environment at a specific time and is not a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

There is no guarantee that any forecasts made will come to pass.