Tech sector optimism grows as stocks soar as artificial intelligence boom

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U.S. tech companies have started the year on a low note, plagued by cost overruns due to pandemic-related excess hiring activity and concerns about the impact of rising interest rates. Things looked bleak, but then came artificial intelligence (AI).

Since then, tech and blue chip S&P 500 indices have been boosted by breakthroughs in generative AI led by chatbot ChatGPT and the promise of a new era of growth for the sector. The S&P 500 is up 18.6% through 2023, while the tech-heavy Nasdaq Composite is up 35.7%. Six months is a long time in a fast-paced industry. The five biggest beneficiaries of the US tech recovery report quarterly earnings for the next two weeks.

Meta, the owner of Facebook, Alphabet, the parent company of Google, Apple, Amazon and Microsoft.

While individual factors influence recent stock performance, the AI ​​frenzy is driving the sector as a whole. Chipmaker Nvidia, which reported three-month earnings in May, epitomizes the resurgence. The company has become a million-dollar company, but the demand for its own products that provide computing power to new technologies is gone.

Dan Ives, chief executive of U.S. financial firm Wedbush Securities, has said big tech is the "leader" of the AI-related stock boom and expects spending on such ventures to reach $800 billion (£625 billion) over the next decade.

“Looking toward the second half of 2023, we expect a broader technology upswing as investors continue to digest the impact of this new wave of $800 billion in AI spending and what it means for the software, chip, hardware and technology ecosystem in the year ahead,” he said. Ives added that Microsoft, Amazon and Alphabet are benefiting from cloud computing services that rent out server capacity to companies. Cloud services are used to train and run generative AI models, the data-hungry networks that power chatbots and image generators.

“We don't see this as the '1999-point bubble moment,' but the '1995 Internet moment.' We estimate that AI's share of the total IT budget could rise from [about] 1% in 2023 to up to 8-10% by 2024," he says.

However, some investment professionals caution. Hyun Ho Song, portfolio manager of Fidelity's global technology fund, said last week that the tech sector has become a "very narrow, theme-driven market" driven by generative AI. In fact, US tech stocks fell on Thursday after investors reacted poorly to recent results from Tesla and Netflix.

“It's important to remain cautious, or be realistic,” he says. “Every tech company seems to be proposing an AI approach.”

James Knightley, chief international economist at ING in New York, said the macroeconomic backdrop for U.S. stocks is tough, with slowing retail sales and shrinking industrial production.

“My personal opinion is that there are very few macro aspects that are driving stock prices higher. Rather, the market believes that the risk of a recession is not as high as it used to be, and that while advances in AI and technology have the potential to boost economic activity, the biggest beneficiaries are the companies that do so," he says.  

AI frenzy aside, tech companies are not immune to the impact of the US (and global) economy at large, and Apple's sales are expected to decline. For example, Meta is exposed to macroeconomic conditions because it relies on advertising revenue.

Tony Sycamore, an analyst at online trading platform IG, said the good news, including Meta's AI efforts, the launch of a "Twitter killer" thread and tougher cost controls, is already reflected in the stock. “The danger of rising expectations rather than a 136% rise in stocks is that a lot of good news is already priced in,” he said.

But AI offers compelling answers to every concern.