The AI hype surrounding the tech sector has boosted the Nasdaq and the S&P 500 this year. In fact, the rally in these indexes this year has been driven by the Super Seven tech stocks, including Nvidia (up 174.7%), Meta (up 118%), Tesla (up 99%), Apple (up 45.3%), Alphabet (up 40%), Microsoft (up 39.4%) and Amazon (up 44.2%) (as of Jun 2, 2023).
So, basically, it’s a narrow market, where a few winners are driving the rally. Four of these seven companies are some of the largest in the world, with market caps of more than $1 trillion — Apple, Microsoft, Alphabet and Amazon — while Nvidia is close to that mark.
Will AI Mania Continue or Slow Down Ahead?
BMO Capital Markets chief investment strategist Brian Belski believes that the AI boom “is real and likely to propel future growth for many stocks within the space," Belski wrote in a note, "despite an extremely strong (year-to-date) sector performance, we believe the momentum, even if it slows a bit, is likely persist for the foreseeable future,"
as quoted on Yahoo Finance.
Moreover, AI stock valuations are nowhere near the levels seen in the past innovation waves, per analyst Michael Goldstein,
as quoted on CNBC. So, the AI craze is not quite the same as the dot-com bubble and may not see the same misfortune. Not All in the Super Seven Are Overvalued
Microsoft has a forward P/E of 34.7X versus an industry P/E of 30.2X. Apple has a P/E of 30.2X versus an industry P/E of 26.7X. The duo boasts fair valuation. Alphabet has a P/E of 23.1X versus an industry P/E of 30.2X. Meta has a P/E of 22.6X versus an industry P/E of 30.2X.
Three of these seven bigwigs are overvalued. Nvidia has a forward P/E of 52.7X versus an industry P/E of 36.1X. Tesla has a P/E of 60.1X versus an industry P/E of 19.6X. Amazon has a forward P/E of 79.4X versus an industry P/E of 25.9X.
But then Nvidia does not represent the entire AI story. There are a lot of other companies that are still fairly-valued or undervalued and may represent a good entry point to the AI space (read:
Data Center REIT ETF & Stocks: Unsung Hero of AI Boom).
Not only these big techs, there are many small-scale AI companies that could be tapped with the ETF approach. Against this backdrop, we have highlighted a few artificial intelligence ETFs that are great bets now (read:
Guide to Artificial Intelligence ETFs). ETFs in Focus AI Powered Equity ETF ( AIEQ Quick Quote AIEQ - Free Report) Generative AI & Technology ETF ( CHAT Quick Quote CHAT - Free Report) The ROBO Global Robotics and Automation Index ETF ( ROBO Quick Quote ROBO - Free Report) The Global X Robotics & Artificial Intelligence ETF ( BOTZ Quick Quote BOTZ - Free Report) iShares Robotics and Artificial Intelligence Multisector ETF ( IRBO Quick Quote IRBO - Free Report) First Trust Nasdaq Artificial Intelligence and Robotics ETF ( ROBT Quick Quote ROBT - Free Report) Bottom Line
The AI boom is reshaping industries and redefining opportunities. Renowned financial institution Goldman Sachs predicts that artificial intelligence as a whole could drive a remarkable $7 trillion in global economic growth within the next seven years. Such growth will be fueled by accelerated productivity gains resulting from AI's widespread adoption.