A.I. enthusiasm is responsible for the bulk of the stock market’s gain this year

Published Wed, May 3 202311:45 AM EDTUpdated Wed, May 3 20231:55 PM EDT

Artificial intelligence isn't just good for business, it's given the market a boost. Data from Bespoke Investment Group earlier this week showed that four major stocks contributed 60% of the uptick in the S & P 500 — Apple , Meta Platforms , Microsoft and Nvidia. While it's easy to say these stocks have rallied after being badly beaten up in 2022, the momentum can also be attributed to the excitement around AI. In fact, Trivariate Research pegged as much as $700 billion of the $2.5 trillion year-to-date market cap creation as of late April for growth stocks this year to AI's potential. "[The] popularity of ChatGPT was a catalyst for bidding up select AI stocks to a record concentration and contributed to low breadth move up in major indices," wrote equity strategist Dubravko Lakos-Bujas of JPMorgan in a recent note, pegging more than half of the S & P's gain as of late April to Amazon , Alphabet, Microsoft, Meta Platforms, Salesforce and Nvidia. .SPX YTD mountain S & P 500 so far in 2023 The S & P 500 was up 7.3% as of Tuesday's close. Digging deeper into the gains, Nvidia turns up as a big winner. The chipmaker's stock has surged 90% as Wall Street has identified it as a huge beneficiary in the AI boom. Nvidia is a dominant creator of graphics processing units integral to large language models and chatbots like ChatGPT. Meta Platforms shares have doubled. The Facebook parent appears to be hedging its hopes on its metaverse play. AI is a key value driver for the technology behemoth. Despite its cost-cutting initiatives, Meta emphasized AI on its recent earnings call. It's working on a handful of products using generative foundation models and investing in building out data centers for AI applications. Both Nvidia and Meta Platforms are outperforming other surging stocks in the benchmark index by a double-digit margin. Elsewhere, Microsoft and Alphabet have gained more than 27% and 19%, respectively, as the heavyweights battle it out for AI dominance . META YTD mountain Meta shares this year Goldman Sachs projects AI will broadly create about $7 trillion in economic growth globally over the next 10 years and forecasts that generative AI will attain a $150 billion total addressable market. "The substance of the rally in big tech has been a flight to safety," said Deepwater Asset Management's Gene Munster. However, he expects AI tail winds are only getting started. Further gains could be ahead as investors weigh the implications for AI and long-term earnings potential it creates and as more companies get into the space, he said. Some near-term developments in AI may include the official rollout of Alphabet's Bard chatbot, which it opened in March for testing in the U.S. and U.K. Where technology stocks go from here The outstanding run-up in technology stocks presents a sharp contrast to last year's sell-off , when the growth sector took a massive valuation hit as interest rates skyrocketed. While AI tail winds may account for a sizeable chunk of this year's tech surge, whether this rally sustains itself could depend on the macro environment and the Federal Reserve's decision come Wednesday, said Paul Meeks, a portfolio manager at Independent Solutions Wealth Management. "I don't think the tech market will correct to where it came from in October, but I do think that they'll give up some of these gains," he said. That's mostly because markets have more clarity on the macroeconomic environment, although AI is a positive. If the Fed signals a pause Wednesday and rates fall, the market could see tech stocks rip higher. But signs that the central bank will maintain elevated interest rates for longer than expected could also hit sentiment toward the sector. Many market bulls, he added, may have been hoping for cuts this year. "That is I think a false narrative that will end up being disappointing, and that's going to be probably your biggest draw down in tech stocks," he said. To be sure, other factors besides AI have contributed to this year's rally in technology stocks. That includes a drop in bond yields once pressuring lofty tech valuations, and the hope that the central bank may soon pivot from its aggressive rate-hiking campaign in the near future. Elsewhere, Bank of America's head of portfolio strategy, Marci McGregor, said technology stocks and earnings may face pressure from IT spending cuts and volatility, noting her neutral view on the sector, during an interview with CNBC's " Closing Bell " this week. Meanwhile, the easy gains from the AI hype may have already been realized. Jason Tauber, a portfolio manager at Neuberger Berman, said AI stocks should start to experience bifurcation from here on out. Tuesday's more than 48% slump in Chegg represented, perhaps, one of the first dominos to fall and a sign of some of the risks ChatGPT poses to long-standing business models . "Not all tech companies are going to be winners from AI, it really comes down to execution," he said. — CNBC's Michael Bloom contributed reporting