AI-Driven Growth: The Next Phase of Tech Dominance
Tech Giants Reach New Heights
The buzz around artificial intelligence has propelled the “Magnificent Seven” tech stocks to unprecedented success, with Tesla, Meta, Alphabet, and Apple recently hitting record highs. Nvidia shares have seen a staggering 175% gain this year, and investors are eager to see where this trend will take them next.
A Broader Reach
Experts predict that the AI hype will spread to other sectors, such as utilities and software, which will benefit from Big Tech’s significant AI investments. Goldman Sachs’ chief US equity strategist, David Kostin, forecasts the S&P 500 will reach 6,500 by the end of 2025, driven by earnings growth rather than valuation.
Earnings Growth Shift
The rapid earnings growth seen in large-cap tech stocks over the past 18 months is expected to slow, while earnings for the remaining 493 stocks in the S&P 500 are predicted to pick up. BofA’s equity strategy team, led by Savita Subramanian, projects a 6,666 year-end target for the S&P 500 in 2025, driven in part by AI.
AI-Driven Spending
Tech giants like Microsoft, Alphabet, and Meta are expected to increase capital expenditures by 42% in 2024 and another 17% in 2025, reaching a total spend of $244 billion next year. This investment will not only fuel AI development but also drive demand for power to run AI data centers, benefiting the Utilities sector.
The Next Phase of AI
As the AI trade evolves, strategists are shifting their focus from “phase 1” stocks like Nvidia to “phase 2” stocks in the AI infrastructure bucket, which include semiconductor companies and utility power plays. The next phase, dubbed “enabled revenues,” will benefit companies that use AI to drive sales, such as software and services stocks like Mastercard, Salesforce, and Adobe.
A New Wave of AI Stocks
Goldman Sachs’ “enabled revenues” basket has already seen significant gains, with Salesforce shares adding over 10% after reporting earnings and citing the success of its new AI tool. As the AI trade enters its next phase, investors are likely to focus on the adopters rather than the creators, driving growth in new areas of the market.
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