AI Drives S&P 500 Rally, Fueled by Investment and Demand


Artificial intelligence (AI) has been a key factor in the S&P 500’s strong performance this year. According to BlackRock analysts, this trend is expected to continue, driving returns over the next six to twelve months. This article explores the reasons behind this positive outlook and the sectors that are likely to benefit most from continued AI investments.

AI’s Influence on the S&P 500: The S&P 500 has experienced a significant rally, with AI playing a major role in these gains. BlackRock’s global chief investment strategist, Wei Li, highlights that AI will continue to power the market. Li and her team cite substantial capital expenditures on AI and rising demand for low-carbon energy as key reasons for their optimistic outlook.

Capital Investments in AI: Investments in AI data centers are projected to increase considerably, with annual growth rates of 60%-100% anticipated in the coming years. Li compares this surge in spending to the Industrial Revolution, emphasizing the transformative power of AI technology. These significant capital expenditures are expected to drive earnings growth and support the market’s upward trajectory.

S&P 500 Performance and AI: As of early July, a record $6.15 trillion was held in money market funds, with the S&P 500 reaching 36 record highs this year. In the first half of 2024, the index gained 14.5%, with AI heavyweight Nvidia (NASDAQ:NVDA) accounting for approximately one-third of these gains. The robust performance of large-cap tech companies, supported by impressive quarterly results, has been a key driver of this growth.

BlackRock’s Positive Outlook: BlackRock strategists do not view the concentration of equity performance among a few megacap stocks as a concern. They expect large technology companies to continue investing heavily in AI, leading to further outperformance by chip producers and firms in the energy and utilities sectors. According to BlackRock’s 2024 Midyear Global Outlook, markets are likely to reward perceived AI winners over the next six to twelve months.

Investment Opportunities: Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock, advises investors to embrace risk and move away from cash. She highlights opportunities in sectors poised to benefit from the AI boom, such as Energy, Health Care, and Utilities. The growing need to power data centers and chip manufacturing plants has driven the S&P 500 Utilities ETF up more than 8% year to date, compared to a loss of about 7% in 2023.

Potential Risks to AI Growth: Despite the optimistic outlook, several risks could slow down or disrupt AI’s development and adoption. These include potential challenges from policy and regulations, rules governing the use of AI, and supply bottlenecks amid growing demand for metals and minerals like copper, aluminum, and lithium. BlackRock strategists caution that these factors could pose obstacles to the continued growth of AI-driven sectors.

Conclusion: AI-driven growth has been a major factor in the S&P 500’s performance, and BlackRock analysts expect this trend to continue. With substantial capital expenditures on AI technology and growing demand for low-carbon energy, the market is positioned for further gains. Investors should consider opportunities in sectors set to benefit from the AI boom, while remaining aware of potential risks. As AI continues to transform industries and drive market performance, the S&P 500 is likely to see sustained growth in the coming months.