Investor enthusiasm for artificial intelligence (AI) will continue to be the major driving force behind the U.S. stock market in 2024, propelling technology stocks to new heights throughout the decade. Analysts from UBS Global Wealth Management firmly believe that the investment case for AI and related companies, particularly those in the semiconductor industry, will not only persist but also strengthen in the years to come.
According to a team of analysts led by Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, global AI revenue is projected to increase fifteen-fold, reaching a staggering $420 billion by the end of 2027. This represents a significant surge from $28 billion in 2022 and is primarily driven by the strong demand for AI computing and graphics-processing-unit chips expected within the next 12 to 18 months.
The recent earnings report from Taiwan Semiconductor Manufacturing Co. (TSMC), one of the leading chip makers in the industry, aligns with UBS's forecast. TSMC reported better-than-expected profit and revenue for the fourth quarter of 2023 and anticipates robust revenue growth in 2024 due to high demand for high-end chips utilized in AI applications.
As evidence of the increasing importance of AI in the tech sector, U.S.-listed shares of TSMC soared 12.8% during the previous week, marking their most impressive weekly performance since November 11, 2022.
Marcelli and her team are convinced that AI could potentially be the defining tech theme of the decade, as it offers unparalleled growth potential compared to other sectors.
Addressing concerns about high valuations for megacap technology stocks, the analysts assert that these valuations are justified. While global semiconductor stocks trade at a premium of approximately 25% compared to their five-year average, Marcelli attributes this premium to the significant evolution of semiconductors throughout the past five years, their exposure to various mega-trends, and their robust pricing power.
See: Is AI hype starting to fade? Companies are poised to turn the talk into action in 2024, says Deutsche Bank.
S&P 500 Hits New Record High, Signaling Recovery from Challenging Period in Financial Markets
After enduring an arduous two-year period marked by the most aggressive monetary-tightening cycle in over four decades, the S&P 500 SPX has finally achieved a noteworthy milestone. On Friday, the index closed at a record high, marking its first such achievement since early 2022.
Throughout the past month, the S&P 500 has been on the cusp of reaching all-time highs, and it was ultimately propelled into record territory by strong gains from prominent tech giants. Despite a shaky start to the year, these substantial advances have instilled confidence in the market.
It is common for headlines to emphasize caution in response to all-time highs, encouraging individuals to sell off their investments. However, according to Marcelli and her team, there is no need to panic. Their analysis of historical data reveals that following a new all-time high, the S&P 500 has demonstrated impressive returns over one-, two-, and three-year periods, averaging 12%, 23%, and 39%, respectively.
Related: Tech Leads January Rally in Stock Market. What to Expect in February.
While the UBS analysts maintain an optimistic outlook, they do not anticipate a repeat of last year's exceptional performance. In 2023, the S&P 500 surged by over 24% and the Dow Jones Industrial Average DJIA achieved record highs by year-end. However, Marcelli suggests that the stock market may experience a "digestion phase" in the near term. Nevertheless, she believes that the rally may continue throughout the year, buoyed by evidence of a soft landing for the U.S. economy and robust earnings growth.
To build upon Friday's historic milestones, U.S. stocks have continued their upward trajectory on Monday. The S&P 500 is up by 0.2% and is trading at 4,851, while the Dow industrials have risen by 0.3% and the Nasdaq Composite COMP has surged by 0.4%, based on FactSet data.
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