Global Courant
At the end of the worst year for stocks since 2008, no one could have imagined that an innovation from a humble Microsoft-backed startup would swoop in to revitalize a once-thriving growth industry. The excitement surrounding ChatGPT has resurrected the suppressed technology sector from the grave. Six months later, the promise of generative AI has sent the Nasdaq Composite up 31.7%, its best first half since 1983. The broad enthusiasm surrounding this innovation contributed to most of the market’s first half gains, winning out dominant AI chipmaker Nvidia by a whopping 190% and major tech companies including Meta Platforms by 139%. Microsoft and Alphabet added more than 35% each, while Apple, which recently unveiled its own mixed reality headset, added credibility to the metaverse statement, closing above a $3 trillion market cap on Friday. While it’s hard for investors who sat on the sidelines in this tech-driven run to shake off regret, those who missed out on what some are calling the next big thing since the internet needn’t fear they’ve hit the jackpot lost. The first-half advantage may dwarf second-half gains, but AI is only in the early innings, Ken Mahoney of Mahoney Asset Management warned. He compared the run-up to what the markets saw in the late 1990s. “We are in a very, very early stage,” says Jan Szilagyi of Toggle AI. “It’s going to be a very volatile ride.” Betting on Nvidia Nvidia has taken Wall Street by storm this year. As a dominant chipmaker creating graphics processing units that form the basis of large language models, it made the biggest profits to date. However AI evolves, Nvidia has been seen as the main beneficiary by many investors. Shares rose 24% on a day in May as the company made a blowout forecast fueled by rising demand for AI chips. NVDA YTD Mountain It will be hard for Nvidia to match the triple-digit returns it achieved in the first half of 2023. yet. Future earnings for 2023 may pale in comparison to the triple-digit jump to start the year, but Wall Street’s consensus price target implies an 8% increase from Friday’s close. “What will come in the second half will still be healthy earnings,” said Sylvia Jablonski, CEO of Defiance ETFs. “There’s a reason to still go into these names, get more out of stock than you’ll cash in, but I don’t think Nvidia will move 100% again.” Paul Meeks, portfolio manager at Independent Solutions Wealth Management, is amazed at the significant rise in Nvidia – and technology stocks more broadly – and sees the chipmaker as a “special” name that any tech-focused executive competing against the benchmarks should probably use. to have. While stocks look expensive, last trading at a futures price-to-earnings ratio of nearly 56 times, it’s one of the few AI players to see significant upward movement and significantly adjust estimates as well, he said. Investors looking for a cheaper way to capitalize on the AI trend may want to consider Advanced Micro Devices, which Meeks describes as a “poor man’s Nvidia.” He said it is ready for growth. Shares are up about 76% in the first half. For those more cautious about Nvidia, Mahoney sees Microsoft as a safer way to capitalize on the AI trend, given its market presence in major tech verticals, including cloud and software. Investors might consider picking up stocks on a pullback, he said. Microsoft, a backer of ChatGPT maker OpenAI, is up 42% in the first half and will battle it out with Alphabet for the title of the world’s leader in chatbots. He considers names like Nvidia and Microsoft to be AI’s “tricks and spades”, saying these companies are some of the best ways to capitalize on the trend. Mahoney is wary of companies that focus solely on AI and don’t have diverse business models, who could be among the first to falter. Early Opportunities Outside Big Tech While technology stocks may be the purest way to invest in artificial intelligence, investors looking for the next big winner can find the best opportunities outside the sector. Jordan Stuart, a portfolio manager at Federated Hermes, provides an example. He expects biotechnology and healthcare stocks to benefit from AI tools that allow drug developers to reduce research and development costs and potentially get drugs to market faster. It can also help doctors with treatment plans. In the weight-loss drug market, dominated by names like Eli Lilly’s Mounjaro and Novo Nordisk’s Ozempic, he sees AI as a tool that could potentially help personalize doses and monitor patient responses. “It’s long, it can be dangerous and often unnecessary,” Stuart said of the drug market. “This is where AI use cases can move the needle a little bit.” While Stuart declined to provide specific stocks to capitalize on this trend, numerous pharmaceutical companies are already working with artificial intelligence. This week, Insilico Medicine, a Hong Kong-based biotech, began human clinical trials of a drug that used AI to pinpoint a target and its design. Other likely winners are retail companies that are already implementing AI to improve efficiency and manage inventory, Mahoney said. Meeks sees potential in old economy industrial stocks. A market correction ahead? Not everyone on Wall Street expects clear skies in the second half of the year. While many are calling for the industry and broader market to wrap up the year, they are also bracing for heightened volatility as the question arises as to whether the economy will continue to slow into recession. For investors worried they missed the AI-driven 2023 rally, a silver lining could come in the form of a market correction spurred by volatility and some profit-taking. “There will be an opportunity to get into some of these stocks at probably better levels than now,” Szilagyi said. “It’s just the nature of markets.”
