Investors’ enthusiasm about artificial intelligence will remain the key theme for the U.S. stock market in 2024 and will drive technology stocks higher for the rest of the decade, according to analysts from UBS Global Wealth Management.
“Despite the strong performance seen so far, we believe the investment case for AI and related companies, especially those in the semiconductor industry, will persist in 2024, and is in fact set to strengthen,” a team of analysts led by Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a Monday note to clients.
The bank expects global AI revenue to grow 15 times to $420 billion by the end of 2027, from $28 billion in 2022, driven by “particularly strong demand” for AI computing and graphics-processing-unit chips in the next 12 to 18 months.
The UBS forecast was reflected in the recent earnings report from one of the biggest chip makers in the industry, Taiwan Semiconductor Manufacturing Co.
2330,
which on Thursday posted better-than-expected profit and revenue for the fourth quarter of last year. The chip maker also said it expects strong revenue growth in 2024 on robust demand for high-end chips used in AI applications this year.
U.S.-listed shares of TSMC
TSM,
surged 12.8% last week to book their best weekly performance since Nov. 11, 2022, according to Dow Jones Market Data.
“We think AI could arguably be the tech theme of the decade, as we don’t see similar growth profiles elsewhere,” Marcelli and her team wrote.
Meanwhile, high valuations for megacap technology stocks are justified, according to the analysts. Global semiconductor stocks are trading at a premium of about 25% versus their five-year average, Marcelli said, and that means the premium is backed by “the significant evolution of semiconductors over the past five years with exposure to many mega-trends and strong pricing power.”
The S&P 500
SPX
on Friday posted its first record close since early 2022, emerging from a painful two-year period for U.S. financial markets, which struggled with the most aggressive monetary-tightening cycle in more than 40 years.
The new all-time high for the large-cap benchmark index was reached after stocks traded within touching distance of the records for about a month. Strong gains for megacap tech companies Friday finally pushed the S&P 500 to record territory after a shaky start to the year.
While all-time highs for stocks are often met with flashing headlines to hit the sell button, Marcelli and her team said that panic is not particularly warranted. “Over the past 60 years, in the one-, two-, and three-year periods following a new all-time high, S&P 500 returns have averaged 12%, 23%, and 39%, respectively,” they wrote on Monday.
See: Tech leads stock market’s January rally by wide margin. Watch out for February.
However, the UBS analysts said 2024 will not be a repeat of 2023, when the S&P 500 surged more than 24% and the Dow Jones Industrial Average
DJIA
finished the year near a record high.
Instead, it’s likely that U.S. stocks might enter “a digestion phase” in the near term, Marcelli noted, but she said the rally could extend a bit further throughout the course of this year, supported by further evidence of a soft landing for the U.S. economy and by healthy earnings growth.
U.S. stocks were higher on Monday to build on Friday’s historic move to record highs for both the S&P 500 and the Dow industrials. The S&P 500 was up 0.2% to trade at 4,851, while the Dow industrials were rising 0.3% and the Nasdaq Composite
COMP
was surging 0.4%, according to FactSet data.
