Apple Inc. sets a new milestone by reaching a market capitalization of $3 trillion. a remarkable demonstration of the transformative power of Artificial Intelligence (AI )technology. The first half of 2023 has witnessed the Nasdaq 100 Index reach historic highs, primarily driven by an unprecedented surge in AI innovation. Despite a backdrop of economic concerns, this AI boom has added a staggering $5 trillion to the value of companies in the index. The trend marks the best-ever first-half performance for the Nasdaq 100, with technology companies, particularly those invested in AI, taking center stage. However, this significant growth has also raised questions about inflated valuations and the sustainability of the AI trend.
The Nasdaq (National Association of Securities Dealers Automated Quotations)-100 is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index. More than 3,300 companies are traded publicly on the NASDAQ exchange.
AI boom fuels record growth in the tech sector
The landscape of the stock market was painted in unprecedented hues in the first half of 2023 as the technology sector experienced a boom like never before. Riding the wave of this surge, the Nasdaq 100 index recorded its best first-half-of-a-year performance ever.
Stock traders displayed unyielding optimism on Friday as data signaled inflation was moderating, albeit at the expense of economic growth. As a result, equities extended this year’s gains, with tech cementing its leadership role amid the accelerating rise of artificial intelligence (AI). This positive sentiment was further bolstered by traders adjusting their positions at the end of a quarter characterized by a pervasive fear of missing out.
Since the year’s start, nearly $5 trillion has been added to the value of companies in the Nasdaq 100. This impressive increase has occurred despite ominous bubble warnings, with the tech-heavy gauge leaping almost 40%. This surge has assisted in pushing the S&P 500 index up by 16% in 2023. The gains have been even more striking within the mega-cap space, soaring approximately 75%.
AI fascination trumps potential market hurdles
Despite the backdrop of recession fears, heightened inflation levels, potential Federal Reserve hikes, geopolitical risks, debt ceiling debates, and the collapse of some regional banks, the power of generative AI has held a grip on market sentiment. While comparisons have been drawn to the dot-com bubble of 2000, experts like BlackRock’s Tony DeSpirito assert that the AI rally is fundamentally different. According to DeSpirito, chief investment officer of U.S. fundamental equities at BlackRock, “Demand is really real. The orders are there.”
However, following such a vigorous rally, concerns around valuations have spurred an uptick in bearish bets against the largest tech companies. Short interest as a percentage of shares available to trade is nearing 12-month highs for Microsoft, Tesla, and Amazon, as per data compiled by S3 Partners.
Is this AI trend in Nasdaq 100 sustainable?
Despite potential concerns, the general outlook for 2023 remains positive, backed by historical data suggesting strong early gains in Nasdaq 100 often lead to positive returns in the latter part of the year. Industry experts advise investors to exercise selectivity with AI-related stocks following the robust year-to-date rally.
As noted by Sundeep Gantori, equity strategist at UBS Global Wealth Management, “We don’t believe the AI trend is a bubble, but we see better risk-reward in mid-cycle industries (software, internet) and tech laggards.”
Overall, barring any evidence of technical deterioration, it is likely that markets will continue to ascend into mid-to-late July before a minor correction in August.
