Nvidia Leads the Charge as AI Stocks and Sky-High Valuations Define 2023

The Nasdaq 100 index is celebrating its best year in over a decade, driven by the unwavering investor enthusiasm for artificial intelligence (AI), which has overshadowed concerns about rising interest rates in 2023. At the forefront of this AI revolution stands Nvidia Corp. (NASDAQ:NVDA), surging ahead with a remarkable 230% advance, earning the distinction of being the standout performer in both the Nasdaq 100 and the S&P 500 Index.

Nvidia’s Unmatched Rally

Amid ongoing debates about whether Nvidia’s stock is overvalued or undervalued, one certainty prevails: Wall Street analysts foresee no end to the unprecedented surge in profits propelling the company’s run. Projections indicate that Nvidia is poised to generate approximately $48 billion in profit over the next 12 months, a substantial surge from the initial expectations of around $10 billion at the year’s outset.

Nasdaq Thrives Despite Rising Rates

Contrary to expectations, the tech sector showed resilience against a steady climb in interest rates throughout the year. The Nasdaq 100 continued its ascent despite the 10-year US Treasury yield hovering above 4% for the majority of the year. Fueled by rising profits resulting from significant workforce reductions and spending constraints, technology stocks have recently soared, signaling investor confidence in the Federal Reserve’s conclusion of its historic policy tightening campaign.

The dominance of Tech Giants

The combined weighting of the seven largest technology and internet-related stocks — Apple Inc. (NASDAQ:AAPL), Microsoft Corp. (NASDAQ:MSFT), Alphabet Inc., Amazon.com Inc., Nvidia, Meta Platforms Inc., and Tesla Inc. — reached a record 29% in the S&P 500 in November. Investors gravitated towards these industry leaders, betting on their optimal positioning to capitalize on AI advancements due to their extensive scale and financial robustness. This group accounts for approximately two-thirds of the benchmark’s 23% gain in 2023.

Valuations Remain Elevated

While increased profits have tempered valuations from their previous heights, they still remain lofty. The Nasdaq 100 is currently valued at around 25 times projected profits over the next 12 months, according to Bloomberg data. Although this marks a decline from the peak of 30 observed in 2020, it remains well above the two-decade average of 19 times, emphasizing the enduring high valuations in the AI-centric tech landscape.