Equity Outlook: AI Stars Eclipse Broader Earnings Resilience

Excitement over AI has driven equities this year. Yet investors should maintain a disciplined, long-term focus amid uncertain market conditions.

Global equities advanced in the second quarter, led by a narrow group of stocks seen as big winners from the artificial intelligence (AI) revolution. Yet beneath the surface, many more companies can be found with resilient earnings potential to help portfolios thrive through challenging conditions ahead.

Recent enthusiasm for technology has overshadowed concerns about interest rates, inflation, and recession. Stocks shrugged off these risks during the second quarter, as the MSCI ACWI Index rose by 6.6% in local-currency terms, taking its year-to-date gains to 14.0%. Regional returns were mixed, with Europe, emerging markets, and China underperforming (Display). Japanese stocks rallied on signs of corporate governance reform and an escape from deflation, as well as a weaker yen. US stocks were the center of attention, as optimism about AI breakthroughs fueled the technology-heavy S&P 500 and NASDAQ.\

Japanese and US Markets Led Regional Gains; Technology Stocks Surged

Technology and consumer discretionary stocks led global gains. Materials and utilities stocks were weak, while energy underperformed as oil prices declined. Global growth stocks outperformed value during the quarter, driven by US market trends. Outside the US, style returns were more balanced.

Narrow Group of Stocks Dominated Returns

During the first half of 2023, 10 US stocks accounted for 79% of the S&P 500’s gains (Display) and 54% of the MSCI ACWI’s gains. This group, including NVIDIA, Microsoft, Apple, and Alphabet Inc. (Google’s parent), is widely seen as a direct beneficiary of generative AI’s potential to transform business productivity. NVIDIA—which posted the strongest total returns in the first half—manufactures powerful graphics processing units (GPUs) that are the backbone of the AI revolution.

10 Stocks Dominated US Market Returns in First Half