AI-driven growth has been a significant force behind the S&P 500’s (^GSPC) impressive performance this year. According to BlackRock (NYSE:BLK) analysts, this trend is expected to persist, fueling returns over the next six to twelve months. This article explores the reasons behind this bullish outlook and the sectors that stand to benefit the most from continued AI investments.
AI’s Impact on the S&P 500: The S&P 500 has experienced a robust rally, with AI playing a crucial role in driving these gains. BlackRock’s global chief investment strategist, Wei Li, emphasizes that the AI juggernaut will continue to power the market. Li and her team cite enormous capital expenditures on AI and growing demand for low-carbon energy as key reasons for their positive outlook.
Capital Expenditures on AI: Investments in AI data centers are projected to rise significantly, with annual growth rates of 60%-100% expected in the coming years. Li compares this surge in spending to the Industrial Revolution, highlighting the transformative potential of AI technology. This substantial capital expenditure is expected to drive earnings growth and support the market’s upward trajectory.
S&P 500 Performance and AI: As of early July, a record $6.15 trillion was held in money market funds, with the S&P 500 notching 36 record highs this year. In the first half of 2024, the index gained 14.5%, with AI heavyweight Nvidia (NASDAQ:NVDA) accounting for roughly one-third of these gains. The strong performance of large-cap tech companies, bolstered by impressive quarterly results, has been a key driver of this growth.
BlackRock’s Bullish Outlook: BlackRock strategists do not view the concentration of equity performance among a few megacap stocks as a problem. They expect large technology companies to continue investing heavily in AI, leading to further outperformance by chip producers and firms in the energy and utilities sectors. According to BlackRock’s 2024 Midyear Global Outlook, markets are likely to reward perceived AI winners over the next six to twelve months.
Investment Opportunities: Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock, advises investors to lean into risk and step away from cash. She highlights opportunities in sectors poised to benefit from the AI boom, such as Energy, Health Care, and Utilities. The growing need to power data centers and chip manufacturing plants has driven the S&P 500 Utilities ETF up more than 8% year to date, compared to a loss of about 7% in 2023.
Risks to AI Growth: Despite the optimistic outlook, several risks could slow down or interrupt AI’s build-out and adoption. These include potential challenges from policy and regulations, rules governing the use of AI, and supply bottlenecks amid growing demand for metals and minerals like copper, aluminum, and lithium. BlackRock strategists caution that these factors could pose obstacles to the continued growth of AI-driven sectors.
Conclusion: AI-driven growth has been a significant driver of the S&P 500’s performance, and BlackRock analysts expect this trend to continue. With substantial capital expenditures on AI technology and growing demand for low-carbon energy, the market is poised for further gains. Investors should consider opportunities in sectors set to benefit from the AI boom, while remaining mindful of potential risks. As AI continues to transform industries and drive market performance, the S&P 500 is likely to see sustained growth in the months ahead.
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