After slumping by more than 30% in 2022, technology stocks are back in favour. China’s faster than expected re-opening post COVID, the recovery in chip demand and signs of easing inflation at the start of the year rekindled investors’ interest. Tech heavyweights i.e., Korea and Taiwan have seen huge inflows to their equity markets and to date are the region’s top performers. Of late expectations that the US Fed is nearing the end of its rate hiking cycle and exuberance over the prospects of Artificial Intelligence (AI) have fuelled the rally in US equities.
A closer look will reveal most of S&P 500’s returns this year have been driven by just the top seven tech stocks. These seven comprise almost 26% of the large-cap index’s total weight. The performance of the equal-weighted S&P 500 index significantly lags the market cap-weighted benchmark, as illustrated below in the chart. Whether this AI-powered rally will widen out to the broader market remains to be seen.
According to Goldman Sachs’ estimates, AI could drive an impressive ~ USD 7 trillion in global economy growth over 10 years, along with an annual 1.5% increase in labour productivity. But any new revolutionary tech takes time to filter down to the economy; productivity numbers only started to increase 10 years after the first mass market personal computer was introduced.
Still given the speed of technology and communications nowadays, AI is expected to leapfrog past revolutionary tech in adoption times across all verticals. Eastspring’s Multi Asset Portfolio Solutions team sees the AI-inspired story extending beyond direct beneficiaries such as semiconductor and pure AI stocks. The true beneficiaries of the AI era will be companies in sectors outside tech, such as healthcare and finance. For example, the healthcare sector can leverage AI tools for quality improvement in their medical advice via quicker and more efficient patient diagnosis while in the finance sector, banks can use vast amounts of data to predict default likelihoods as well as automate investment selections tailored to the customers’ exact specifications.
