Dominant AI trade confronts test as bellwether Nvidia reports earnings

NEW YORK, Aug 27 (Reuters): The artificial intelligence theme that has propelled markets over the past couple years faces a crucial moment on Wednesday, when bellwether Nvidia Corp reports its second-quarter results.
Technology shares, including a number of signature stocks in the AI trade, have wobbled this month with investors pointing to some signs of caution emerging in the AI industry.
The declines have taken some of the steam out of an array of tech and other stocks that have sizzled since chatbot ChatGPT unleashed a frenzy over the potential for AI about three years ago.
An equal-weighted basket of 50 AI-related stocks tracked by Bespoke Investment Group-which includes many of the world's biggest tech companies-has soared nearly 170 per cent since the end of 2022, as of Monday.
"AI is a critical piece of what is driving stocks right now," said Peter Berezin, chief global strategist at BCA Research. This year, strong gains for number of heavyweight tech stocks exposed to AI have helped power major equity indexes to record highs.
Semiconductor giant Nvidia has ridden its position as the dominant AI player to become the first company to top $4 trillion in market value last month.
Its more-than 30 per cent gain this year alone has accounted for nearly one quarter of the S&P 500's 10.4 per cent year-to-date total return as of Monday, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. More broadly, 10 top AI plays have contributed nearly half of the index's year-to-date return, according to BCA Research.
Shares of data and analytics firm Palantir Technologies, have doubled, while other chipmakers including Broadcom and Advanced Micro Devices have also handily outpaced the broader market.
Earlier in the reporting period, companies such as Microsoft and Google parent Alphabet unveiled significant capital spending, as AI helped results.
AI stock enthusiasm has spread beyond tech and tech-related areas including to utilities and power equipment companies amid spiking energy demand expected to be needed to fuel the technology.
Industrial firm GE Vernova and utilities sector members Constellation Energy and Vistra are among the non-tech stocks that have put up strong gains in the past year, helped by AI excitement.
The AI enthusiasm has helped drive stock valuations well above historical levels. The overall S&P 500's price-to-earnings ratio, based on expected earnings over the next 12 months, last stood at 22.4 times, according to LSEG Datastream. That is near its highest level in over four years, and some 40 per cent above its long-term average of 15.9.