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Wall Street has been in great shape over the past year, hovering around a record high, due to two factors – the Artificial Intelligence Craze and a less-hawkish Fed. The S&P 500 is up 28.6%, the tech-heavy Nasdaq has gained about 34% and the Dow Jones has advanced about 20% in the past year.
The 'Magnificent Seven', which makes up more than one-fourth of the S&P 500 and 40% of the Nasdaq, drove Wall Street last year with an AI craze, returning 106% in 2023. This performance doubled the Nasdaq 100’s nearly 54% gain and breezed past the S&P 500’s 24% gain.
As 2024 began, the AI theme became more broad-based, impacting all sectors and industries, with companies of various sizes joining the fervor. Former Cisco CEO John Chambers has predicted that AI would be the driving force behind the stock market for the next decade. He anticipates that AI-related stocks will outperform non-AI stocks by a ratio of three to one in terms of returns, as quoted on CNBC.
AI Investment Potential
Chambers suggested that investors who consistently allocate funds to AI stocks over the next five to ten years will likely see significant gains. He noted that a substantial portion of venture capital in the U.S. is already being directed towards AI stocks, with expectations for this trend to continue and even intensify.
Nvidia’s (NVDA - Free Report) latest earnings results also point to this winning proposition. Nvidia has been recording growth in sales due to a diverse range of customers beyond major cloud service providers, including companies like Meta and Tesla, as well as pharmaceutical firms. The automotive industry is also an important consumer of Nvidia's data-center chips, particularly in the advancement of self-driving technology.
Fed Policy: Another Defining Factor of Stock Rally
Wall Street has been looking for cues to the start of the Fed rate cuts (or at least any solid announcement) for the past year. Any expression of confidence by the Fed in handling inflation and slashing rates in the near term encourages investors and vice versa.
On this note, the Federal Reserve’s latest minutes indicate worries over the lack of progress on inflation. The minutes also showed that various participants showed a willingness to tighten policy further to handle stick inflation. The meeting also showed that inflation was more stubborn than officials had expected at the start of 2024. The very minutes were enough to drag Wall Street down on May 22, 2024.
How to Navigate the Current Situation?
Below, we highlight a few ETFs that could be winning bets for staying afloat in the current macroeconomic backdrop. Let’s delve a little deeper.
Bet On Pure-Play AI – TrueShares Technology, AI and Deep Learning ETF (LRNZ - Free Report)
If you go by the comment of the former Cisco CEO, you should be confident of the prognosis of AI innovations. Chambers compared the transformative power of AI to that of the Internet, but indicated that AI could be even more influential and should change every aspect of daily life multiple times over. We are currently at the starting phase
Be Bullish on Chip Stocks – VanEck Semiconductor ETF (SMH - Free Report)
Nvidia CEO Jensen Huang highlighted the unprecedented demand for the company's AI chips, citing a shortage in supply rather than a lack of interest from customers, an exclusive interview with Yahoo Finance. He highlighted the urgency among data center operators to deploy Nvidia GPUs to enhance productivity and cost efficiency.
Meanwhile, TSMC expects an annual revenue growth of 10% in the global semiconductor industry, due to AI push. Hence, chip stocks are likely to remain strong no matter what happens in the broader economy.
Diversifying Beyond Mega-Caps – iShares Core S&P Total US Stock Market ETF (ITOT - Free Report)
Unlike the previous year's trend, where investors clung to the Magnificent Seven mega-caps for innovations, AI mania and security amidst economic uncertainty, the current year shows a marked shift. Sectors such as financials, utilities, industrials, and energy are making a turnaround, indicating a more distributed market leadership. This minimizes the fears of any correction, uncertainty over the Fed policies and over-centration of some stocks.
Focus on Dividend – Vanguard High Dividend Yield Index ETF (VYM - Free Report)
Some members of the Magnificent Seven have shown signs of stalling in the recent past. Given the uncertain trajectory of further AI innovations, which will continue to evolve, focusing on dividend ETFs may offer a steadier investment strategy. The fund VYM yields 2.82% annually (read: 4 ETF Areas to Play Amid Slower Growth & Rising Inflation).
With the big US indexes becoming too concentrated, it is worth taking a look at the smaller-cap stocks. Pint-sized stocks underperformed their bigger peers in the recent past and offer cheaper valuation. These stocks are more-domestically focused and are less affected by the stronger greenback. However, it is better to have a low-volatility exposure in this segment.
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AI & Fed Driving Stock Market? ETFs to Bet On
Wall Street has been in great shape over the past year, hovering around a record high, due to two factors – the Artificial Intelligence Craze and a less-hawkish Fed. The S&P 500 is up 28.6%, the tech-heavy Nasdaq has gained about 34% and the Dow Jones has advanced about 20% in the past year.
The 'Magnificent Seven', which makes up more than one-fourth of the S&P 500 and 40% of the Nasdaq, drove Wall Street last year with an AI craze, returning 106% in 2023. This performance doubled the Nasdaq 100’s nearly 54% gain and breezed past the S&P 500’s 24% gain.
As 2024 began, the AI theme became more broad-based, impacting all sectors and industries, with companies of various sizes joining the fervor. Former Cisco CEO John Chambers has predicted that AI would be the driving force behind the stock market for the next decade. He anticipates that AI-related stocks will outperform non-AI stocks by a ratio of three to one in terms of returns, as quoted on CNBC.
AI Investment Potential
Chambers suggested that investors who consistently allocate funds to AI stocks over the next five to ten years will likely see significant gains. He noted that a substantial portion of venture capital in the U.S. is already being directed towards AI stocks, with expectations for this trend to continue and even intensify.
Nvidia’s (NVDA - Free Report) latest earnings results also point to this winning proposition. Nvidia has been recording growth in sales due to a diverse range of customers beyond major cloud service providers, including companies like Meta and Tesla, as well as pharmaceutical firms. The automotive industry is also an important consumer of Nvidia's data-center chips, particularly in the advancement of self-driving technology.
Fed Policy: Another Defining Factor of Stock Rally
Wall Street has been looking for cues to the start of the Fed rate cuts (or at least any solid announcement) for the past year. Any expression of confidence by the Fed in handling inflation and slashing rates in the near term encourages investors and vice versa.
On this note, the Federal Reserve’s latest minutes indicate worries over the lack of progress on inflation. The minutes also showed that various participants showed a willingness to tighten policy further to handle stick inflation. The meeting also showed that inflation was more stubborn than officials had expected at the start of 2024. The very minutes were enough to drag Wall Street down on May 22, 2024.
How to Navigate the Current Situation?
Below, we highlight a few ETFs that could be winning bets for staying afloat in the current macroeconomic backdrop. Let’s delve a little deeper.
Bet On Pure-Play AI – TrueShares Technology, AI and Deep Learning ETF (LRNZ - Free Report)
If you go by the comment of the former Cisco CEO, you should be confident of the prognosis of AI innovations. Chambers compared the transformative power of AI to that of the Internet, but indicated that AI could be even more influential and should change every aspect of daily life multiple times over. We are currently at the starting phase
Be Bullish on Chip Stocks – VanEck Semiconductor ETF (SMH - Free Report)
Nvidia CEO Jensen Huang highlighted the unprecedented demand for the company's AI chips, citing a shortage in supply rather than a lack of interest from customers, an exclusive interview with Yahoo Finance. He highlighted the urgency among data center operators to deploy Nvidia GPUs to enhance productivity and cost efficiency.
Meanwhile, TSMC expects an annual revenue growth of 10% in the global semiconductor industry, due to AI push. Hence, chip stocks are likely to remain strong no matter what happens in the broader economy.
Diversifying Beyond Mega-Caps – iShares Core S&P Total US Stock Market ETF (ITOT - Free Report)
Unlike the previous year's trend, where investors clung to the Magnificent Seven mega-caps for innovations, AI mania and security amidst economic uncertainty, the current year shows a marked shift. Sectors such as financials, utilities, industrials, and energy are making a turnaround, indicating a more distributed market leadership. This minimizes the fears of any correction, uncertainty over the Fed policies and over-centration of some stocks.
Focus on Dividend – Vanguard High Dividend Yield Index ETF (VYM - Free Report)
Some members of the Magnificent Seven have shown signs of stalling in the recent past. Given the uncertain trajectory of further AI innovations, which will continue to evolve, focusing on dividend ETFs may offer a steadier investment strategy. The fund VYM yields 2.82% annually (read: 4 ETF Areas to Play Amid Slower Growth & Rising Inflation).
Small-Caps Offering Better Diversification? – Invesco S&P SmallCap Low Volatility ETF (XSLV - Free Report)
With the big US indexes becoming too concentrated, it is worth taking a look at the smaller-cap stocks. Pint-sized stocks underperformed their bigger peers in the recent past and offer cheaper valuation. These stocks are more-domestically focused and are less affected by the stronger greenback. However, it is better to have a low-volatility exposure in this segment.