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Artificial Intelligence still adds star dust to world markets

Artificial Intelligence has been the star dust for the strong performers in the latest round of US earnings results, but can their fortunes continue to rise?

| 6 min read

Leading US tech shares price changes to Tuesday 7 May

The size of the US giants

The World Index has been driven higher over the last year helped by the great performance of US-led technology shares. The dominance of the US is such that 70% of the developed world index by market value comes from US-listed companies. Japan and the UK in second and third place respectively account for just 10% of the index combined.

The largest shares in the index are dominated by US-technology companies in all of the top seven slots, with Alphabet (Google’s parent company) holding two places from its two different share classes. The seven combined make up almost a fifth of the Index. Microsoft on its own has a bigger weighting in the index than any national grouping of quoted companies apart from the US and Japan. Microsoft is valued above $3 trillion, with Nvidia now joining Apple over $2 trillion

Artificial Intelligence has been the star dust for the strong performers

The shares that are expanding thanks to artificial intelligence (AI) have been in much demand. The market became very interested in the potential of AI going into 2024. So far the companies that have done most to develop services or produce the microprocessors for this development have produced good results that have justified and sustained the interest.

The services they offer are rapidly becoming better defined. The companies are moving on from offering experimental services free to users, to offering a range of products that add to software and capabilities that they are already supplying their customers. There are options to charge more for a better service. Microsoft and Alphabet have close relations as suppliers with many businesses who are attracted to enhanced capabilities as they offer them Copilot or Bard.

Giants can fall

Tesla was one of the so called Magnificent 7 technology stocks. It reached a peak of $407 in November 2021 and hit a low of $122 in January 2023. It ran up to $281 by July only to retreat rapidly again this year. It is no longer in the top ten largest shares in the world index. There was likely to be more consumer resistance and pressure on margins going into 2024. We provided analysis of the battery car market as its growth stumbled. Markets are quick to mark down highly rated shares if they cease to grow profits and earnings in the way expected. Apple is still the world’s second largest company by market capitalisation, but has performed less well than the other tech leaders. Worries about its China interests and slowing growth led to questions over its rating. The market expects good turnover and net profit momentum, plenty of cash generation for dividends and share buybacks, and positive comments on prospects to sustain the high ratings of these companies.

Data storage and the Cloud

There has been a rush to install much more data storage and processing capacity in data centres. In the most recent quarterly results, Microsoft reported 23% turnover growth, Amazon 17% and Alphabet 28% from cloud activities. Businesses and individuals are all storing much larger quantities of data and video and expecting faster processing times. This trend requires substantial investment to provide essential infrastructure to back up every business computer and personal mobile phone. It is another important source of growing revenue for the tech giants.

Investors are watching the ability of these companies to expand sufficiently rapidly whilst still retaining control of costs.

Investors do not respond so well to growth promises if there is no clear indication that expansion will be well managed with due concern for the costs of people and property needed to provide the services.

Can the revenue and profit continue to rise?

So far, the companies have showed good progression of turnover and profit despite the obvious costs of introducing the new capacity and services, and despite the free offerings that have helped effect a rapid introduction of the concepts to a wider customer base. The ultimate ability to grow the revenues rests on businesses and individuals being willing to spend more money on buying more phones, laptops and computer pads, and spending more time on them, using an increasing volume of services over them.

So far this has been the case. Covid lockdowns were a big accelerant. It expanded the number of people who needed to get online to carry on with their lives. It expanded the range of activities people wanted or needed to do online. People who had not felt confident with technology acquired some basic skills, and families and businesses turned to remote working, shopping and social calls to replace their lost lives away from home.

Since reopening many people have wanted to carry on with more online activities. Home working has become common for part of many people’s weeks, families use on line to get together more, to download entertainment and to shop. All the time more people and more businesses want to do more things using the internet and digital technology, so there will be more revenue generated from device and software sales, from adverts to pay for free services, from transactions carried out over the web and the rest.

A broadening market?

Artificial Intelligence and the all-conquering web are not the only games in town for investors. The current sustained dominance of the US-tech giants reflects a major shift in purchasing power towards more things being done online, with businesses and families upping their budgets on devices, software and processing through the internet. These very successful companies will only sustain their ratings and their share prices if they continue to deliver the above-average growth and cash generation of recent years. Analysts do have to follow them carefully to warn of any signs of growth stumbles, whilst there are plenty of opportunities outside the US and outside technology to earn decent returns. As the latest results for the major tech companies show, however, there is still plenty of opportunity left in these large and hungry companies out to make further big changes to the way we lead our lives and undertake our work.

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Artificial Intelligence still adds star dust to world markets

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