It has been quite a year in the stock market. With only two months left on the calendar, investors likely wish all years were this good (at least as of right now). The S&P 500 and Nasdaq are up 21% and 22%, respectively. In recent weeks, the S&P 500 has set all-time highs, and so has the Nasdaq, albeit less emphatically than the S&P 500. Another encouraging trend is that more sectors and corners of the market have been contributing to performance in the past few months. That’s particularly significant, given how much performance was concentrated in the “Magnificent Seven” in the first half of the year.
Of course, it should come as no surprise that the S&P 500 and Nasdaq have seen exceptional performance, as those indices are more exposed to the technology-related companies that have led markets for most of the year. At the same time, however, it is healthy for mega-cap technology to moderate and have other sectors step in to fill the performance void, as we have seen these past few months. That said, it would be a difficult environment for the overall stock market if mega-cap technology companies deliver negative performance over time. This, again, is due to their sheer size in the marketplace.
Moreover, as it happens, many of the largest technology companies reported quarterly earnings during the week. The earnings of the mega-cap technology companies have been mixed and some have been hit relatively hard. One of the main takeaways from the week is that investors are showing some nervousness, as many of these companies have increased their respective artificial intelligence (AI) spending initiatives. Most mega-cap technology companies’ traditional profit drivers have remained on relatively solid footing, but investors are looking at this near-term AI spending without a commensurate profit stream and asking questions.
It’s certainly reasonable to ask such questions, and there is no doubt that not every dollar spent is being spent wisely. However, since we appear to be on the precipice of transformational technology, it’s possible some market participants are missing the forest for the trees. That doesn’t mean that AI profits will swiftly come pouring into the coffers of these technology companies next quarter, and setting a specific time frame for monetizing many of these initiatives is difficult. However, like any technology that upends the status quo, it will take time.
. © 2024 BOKF, NA.