The AI boom could fizzle out soon - but that'll just be an opportunity to buy the dip, Barclays says
- Stocks' AI-fueled boom could experience a short-term correction soon, according to Barclays.
- But the bank believes any dip will create a buying opportunity for investors.
Stocks could dip once the initial hype around artificial intelligence fizzles out - but that would just create an opportunity for investors to buy the dip, according to Barclays.
Benchmark indices including the S&P 500 and the Nasdaq Composite have surged over the first five-and-a-half months of 2023 - but most of those gains have come from a small group of mega-cap tech stocks, like Nvidia and Microsoft.
Those high concentration levels will likely lead to stocks giving up some of their stellar early-year gains in the short term before traders are drawn back into tech once AI starts to juice up listed companies' earnings, the British bank said in a note to clients Thursday.
"Historical instances of such narrow stock market leadership suggest that this outperformance is due for a correction in the near term," a team of Barclays strategists led by Venu Krishna wrote.
"However, we think any retracement would present a tactical opportunity rather than a structural collapse of the trade, because multiples have not risen to historical extremes and the expanding AI economy should help its primary beneficiaries grow into their valuations," they added.
So far, AI's main impact on the stock market has been pushing up valuations, with investors piling into names they think will help build the sector in the wake of the sudden explosion of interest in ChatGPT.
But the early signs suggest the new technology will drive up earnings over the longer term too, according to Barclays.
Semiconductor giant Nvidia strengthened its position as 2023's best-performing S&P 500 stock last month after it released second-quarter revenue forecasts that beat Wall Street's expectations by 50% thanks to soaring demand for its AI chips.
Its shares popped 24% the day after that earnings report - and further gains since mean it's now added over $700 billion to its total valuation year-to-date.
Read more: Nvidia has AI to thank for entering the $1 trillion club