The second half of 2024 is now underway. There are myriad reviews about what worked well in equity markets in the first half and what assets and themes could deliver for investors over the next six months. AI permeates both lists.
Well-known mega-cap growth stocks such as Nvidia (NVDA), Meta Platforms (META), and Alphabet (GOOG) have been market darlings this year. AI is a primary reason why. That’s been beneficial to ETFs like the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Both funds have substantial allocations to those names and other AI-related stocks.
It’s possible that market leadership continues in the back half of 2024. Perhaps other sectors will take the reins of leadership from technology and communication services. On the other hand, AI remains in its early innings. And scaling of the technology is just getting going. That could imply QQQ and QQQM can extend their bullish ways in the months ahead.
AI Expansion Taking Flight
The rapid scaling of AI requires substantial expenditures by adopters. That’s constructive for enablers such as Nvidia and other companies residing in QQQ and QQQM. Still, it’s difficult to pinpoint exact spending figures. That’s because there are hurdles to be dealt with, including energy consumption. The good news is that technological innovations, including some purveyed by QQQ/QQQM member firms, could ease those burdens. That could pave the way for the second wave of AI expansion.
“In a second phase, we think investment will broaden out to firms seeking to harness AI – with the amount depending on AI’s buildout and adoption. It is possible that this all results in a third phase of broad productivity gains,” according to the BlackRock Investment Institute.
Examining the fundamentals of some of the most prominent AI names, many of which are QQQ and QQQM components, there’s been ample bubble talk. There are also concerns that these stocks are excessively valued. Those fears may be allayed by the point that earnings per share growth is steady, if not impressive, among the larger AI equities.
Another fundamental aspect to consider is moat — the competitive advantages already established by QQQ/QQQM AI holdings. While AI itself is a relatively young investment thesis, some QQQ/QQQM member firms are already establishing enviable moats. And that could be a sign of long-term share price appreciation because laggards may never be able to adequately keep pace.
“Companies who fall behind are likely to struggle in this environment — partly because central banks won’t be able to respond easily with lower rates if growth weakens, in our view. We are not going back to a time of cheap and plentiful capital,” added BlackRock.
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