Artificial Intelligence: Driving Technology Stocks Higher in 2024 and Beyond

Introduction

2024 promises to be a pivotal year for the U.S. stock market, with artificial intelligence (AI) emerging as a key theme that will continue to drive technology stocks higher throughout the decade. Analysts from UBS Global Wealth Management believe the investment case for AI and related companies remains strong and is poised to strengthen in the coming years.

AI Revenue Growth and Market Outlook

UBS Global Wealth Management predicts a remarkable surge in global AI revenue, projecting a 15-fold increase from $28 billion in 2022 to a staggering $420 billion by the end of 2027. This growth is fueled by a surge in demand for AI computing and graphics-processing-unit (GPU) chips over the next 12 to 18 months.

The growing demand for AI-related products and services is reflected in the recent earnings report of Taiwan Semiconductor Manufacturing Co. (TSMC), one of the industry’s leading chip makers. TSMC reported impressive profit and revenue growth in the fourth quarter of 2023, buoyed by strong demand for high-end chips used in AI applications.

Semiconductors and Valuation

The positive outlook for AI is reflected in the valuations of global semiconductor stocks. According to Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, these stocks are trading at a premium of approximately 25% compared to their five-year average. This premium is justified by the significant evolution of semiconductors in recent years, with exposure to multiple mega-trends and robust pricing power.

S&P 500 Performance and Market Sentiment

The S&P 500 index reached a record close in early 2024, marking a significant milestone after a challenging two-year period for U.S. financial markets. This achievement was driven by strong gains in megacap tech companies, particularly in the AI sector.

Despite the positive market sentiment, UBS analysts caution against panic selling in response to all-time highs. They note that historically, the S&P 500 has performed well in the one-, two-, and three-year periods following a new all-time high, with average returns of 12%, 23%, and 39%, respectively.

Near-Term Outlook and Digestion Phase

While the overall outlook for the U.S. stock market in 2024 remains positive, UBS analysts anticipate a more moderate pace of growth compared to the exceptional performance of 2023. They suggest that the market may enter a “digestion phase” in the near term, as investors assess the impact of economic data and earnings reports.

However, the rally could potentially extend further throughout the year if the U.S. economy continues to exhibit signs of a soft landing and corporate earnings remain healthy.

Conclusion

2024 presents a unique opportunity for investors to capitalize on the growing significance of artificial intelligence in the global economy. With AI-related companies poised for substantial growth and semiconductor stocks trading at a premium, the investment case for AI remains compelling. While market volatility is always a possibility, long-term investors who embrace this technological revolution are likely to reap significant rewards in the years to come.