Top Investors See Plenty of AI Fuel Left to Drive Equity Rally

(Bloomberg) -- The artificial intelligence frenzy is nowhere near finished driving global equities to record highs, according to money managers interviewed by Bloomberg News.

Investors and market strategists at major firms including BlackRock Inc. and BNP Paribas Asset Management said they expect all things AI to feature among the prominent themes in the second half of the year.

While most expect mega-caps such as Nvidia Corp. to remain at the forefront, some others see secondary and tertiary benefactors of AI including utilities and infrastructure providers to take the lead. What’s unanimous is that no one expects the AI buzz to fade.

“We expect AI to be a key theme for the second half,” said Wei Li, global chief investment strategist at the BlackRock Investment Institute. “It’s been a concentrated rally and that’s a feature of the AI transformation rather than a bug in the market. Concentration by itself is not a reason for us to be concerned.”

The S&P 500 Index has surged over 40% since the end of 2022, with the tech behemoths — predominantly winners of the AI theme — driving more than 60% of the advance. Although for some market forecasters the meteoric rally has evoked memories of the dot-com bubble, most say it’s been backed by a robust profit outlook. 

A resilient global economy coupled with wagers on lower interest rates from the world’s biggest central banks is also boosting sentiment. However, a contentious US presidential election looming in November threatens to derail the rally.

For now, investors are betting that firms at the helm of AI are likely to keep surpassing already-high expectations around earnings and market share. They predict sectors including materials, energy and industrials will also benefit.

“Nvidia is the company that wins in this space, basically no matter what,” said Saira Malik, chief investment officer at Nuveen Asset Management LLC, which has $1.3 trillion in assets. Her fund counts Nvidia, Apple Inc. and Amazon.com Inc. among its biggest holdings. “Everyone who wants to shift into AI basically has to use Nvidia’s products,” Malik said.

The majority of more than a dozen investors interviewed by Bloomberg expect global stocks to gain as much as 9% over the next six months, with the US most likely to outperform. Against this backdrop, most said they would buy into equities even at these lofty levels.

“There’s upside for stocks from current levels,” said Ronald Temple, chief markets strategist at Lazard. “If you look back over the last few months, the dips have been pretty small, and that’s partly because there’s money on the sidelines waiting to be put to work. So waiting for the dip might actually be the bad strategy.”

The focus will soon shift to corporate profits. Expectations are sky-high, with analysts forecasting record S&P 500 earnings per share over the next 12 months. The upcoming season begins on July 12, when JPMorgan Chase & Co. reports second-quarter results.

“I’m positive on equities overall,” said Sophie Huynh, senior cross-asset strategist at BNP Paribas Asset Management. “We’re in a kind of last mile for global inflation and that should still be positive for equities, both on price-to-earnings multiples and earnings growth.”

A highlight of the season will again be Nvidia’s results — expected late-August — as investors look for confirmation that the AI boom remains on track. The chipmaker has so far delivered, but elevated valuations for the sector puts it at risk of a wider selloff from any disappointment.

A Goldman Sachs Group Inc. basket tracking AI stocks trades at about 32 times forward earnings, much higher than the S&P 500’s multiple of 21, according to data compiled by Bloomberg News.

Over the next couple of years, if AI firms excluding Nvidia “don’t show they can monetize the AI opportunity by seeing those earnings upgrades turning more positive, then you could have a potential down pressure on share prices,” said Zehrid Osmani, a Martin Currie fund manager. “Our view is to stick with companies that visibly are able to monetize” and are seeing earnings upgrades, he said.

Still, investors are broadly in agreement that the AI benefit to profits will continue supporting the market, coupled with looming interest rate cuts and a solid economy.

“We’re witnessing a surge of innovation that’s likely to drive economic upside relative to market expectations over the next several years,” said Dan Kim, portfolio manager and senior investment analyst at Saturna Capital. 

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