Markets keep climbing despite economic headwinds. Allan Small explains why AI is driving growth and how investors can benefit while managing risk.
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At the time of writing, the S&P 500 is up 10% year to date and nearly 30% over the past year. These gains are happening despite war in the Middle East, oil chaos, slow to no GDP growth, increasing inflation, and a soft labour market. How is this possible? In my view, there is only one reason the markets continue to gain: artificial intelligence (AI).
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This isn’t the first time AI has had a disproportionately positive impact on the markets. In 2022, the S&P 500 was down nearly 20%, its worst year since the financial crisis and fourth-worst in its history. The pandemic and aggressive interest rate hikes hit all industries. Tech, led by Apple, Alphabet, Amazon, Meta, Nvidia, and Tesla aka The Magnificent 7, suffered the greatest losses. The fear of recession was prevalent. And then, on November 30, 2022, Open AI launched ChatGPT. It became clear very quickly that this early version of generative AI would revolutionize how we live and work.
In 2023, the Magnificent 7 and other large-cap tech companies—particularly the companies that design, build, and use the computer chips that make generative AI possible—had a tremendous run, powering the S&P 500 to nearly 27% returns and wiping out the previous year’s losses. CEOs from across industries and around the globe have compared the advent of real-world use cases for AI to the Industrial Revolution. So far, they haven’t been wrong. AI continues to deliver on its promise to touch all aspects of daily life.
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About a year and a half ago, during a phone call with an investor, I had a lightbulb moment. AI could be one of the biggest wealth-building opportunities individual investors will ever see, similar to or potentially even greater than the invention of the car or the internet. Investors looking for growth need to appreciate AI as this massive, generational opportunity. Those who have done just that are reaping the rewards.
Over the past three years, AI-related stocks have fueled investor portfolios. Semiconductor companies, initially led by Nvidia, are a dominant driver of returns, but as AI continues to take hold, the breadth of AI stocks is increasing. This includes companies such as Lam Research, which builds complex tools for AI chip makers, and SanDisk and Western Digital, memory card and data storage manufacturers—essential in today’s AI driven world.
AI-linked stocks now make up a record 45% of the total S&P 500 market cap. Information technology, which is deeply interconnected with AI, drove 45% of last year’s S&P 500 gains.
Globally, Taiwan Semiconductor Manufacturing Company accounts for more than 40% of Taiwan’s benchmark index. Samsung and SK Hynix make up a record 42.2% of South Korea’s KOSPI, thanks to their specialized AI memory chips. Together, these AI stocks have propelled Seoul’s stock market to sixth largest in the world.
According to research from McKinsey, three years since its introduction, 88% of organizations across the globe regularly use generative AI in at least one business function and 62% are experimenting with AI agents.
This tells me AI is here to stay. If you haven’t already invested in AI, it’s time to start. The key is to be disciplined. Do your research. Understand the AI ecosystem and its far-reaching impact. Even old industrial stocks such as Caterpillar are soaring because of the demand for AI data centres.
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Look for value. Make sure you are buying companies that are reasonably priced and positioned for future growth. Pay attention to the price/earnings-to-growth ratio.
Know going in that there will be surges and pullbacks. This happened with Nvidia stock, which has surged more than 1,100% since 2023 but has largely flatlined over the last 10 months and recently slipped 10% from its 52-week high even though it posted record revenues.
As you would invest in any stock in any sector, once a stock hits a target you’ve set, take some of the profit off the table. This will help ensure you’re always managing your risk. Adopting a buy-and-hold-forever strategy does not work.
Finally, and perhaps most importantly, diversify across industries and sectors guided by a focus on value. As I stated at the start of this article, I think AI represents a massive, generational opportunity, but it’s never smart to put all your eggs in one basket. If you want to grow your wealth, AI should be a part of a diversified portfolio.
This information has been prepared by Allan Small, who is a Senior Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Senior Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
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Allan Small is the Senior Investment Advisor at the Allan Small Financial Group with iA Private Wealth and host of The Allan Small Financial Show. He is also the author of How To Profit When Investors Are Scared. He can be reached at [email protected].
