AI-related stocks have accounted for 75 percent of S&P 500 returns, 80 percent of earnings growth and 90 percent of capital spending growth since OpenAI launched ChatGPT in November 2022, noted JPMorgan, as the AI-led frenzy has taken over Wall Street.
Since November 2022, JPMorgan noted that 29 direct AI players in the S&P 500 have surged 181 percent in price return, far outpacing the 25 percent gain in the S&P 500 excluding AI-linked names. Capital equipment firms exposed to AI have also delivered strong returns at 138 percent, while AI utilities lagged with a 65 percent increase.
However, not just growth in share price, the earnings and profitability trends reflect a similar divergence. Direct AI companies saw earnings growth of 124 percent and EBIT growth of 98 percent, during this time, as compared to single-digit growth in the broader ex-AI S&P 500.
Further, AI capital equipment players (Eaton, Trane, Johnson Controls, Quanta) also posted strong earnings and EBIT expansion, while AI utilities recorded more modest gains.
While JPMorgan's direct AI plays from the S&P 500 include 29 stocks, the concentration of AI-led growth comes from the Magnificent 7: Alphabet (Google), Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
Since April, the Magnificent 7 continued to outperform the remainder of the 493 stocks in the S&P 500, rising nearly 50 percent, compared to the ~20 percent growth achieved by the other stocks. Overall, bolstered the Mag 7 pack, the S&P 500 has recorded growth just shy of 30 percent.
Over the past two years, most of the earnings growth for the S&P 500 has come from the seven largest tech players, with the 493 stocks lagging sharply. However, the pace of growth for the seven has begun to slow, while the other stocks pick up pace.
Analysts have flagged the AI-bubble, noting that it is larger than the IT bubble seen in the 90s. Valuations has soared, not just for AI-led counters, but for the benchmark as well.
However, with the rising interest in AI, there is a sharp rub-off effect on adjacent sectors. The demand for data centers and electricity have sky-rocketed.
"Data centers are eclipsing office construction spending and are coming under increased scrutiny for their impact on power grids and rising electricity prices. Specialized power rates for most data centers aren’t enough to cover costs of a new natural gas plant (leaving other customers to foot part of the bill)," noted JPMorgan's Michael Cembalest.
As a result of AI, the investment activity from AI players has been equally aggressive. Direct AI companies' capex and R&D spending grew by 63 percent, while contributing 90 percent to the S&P 500's total capex and R&D spends.
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