Home Brokerage Tech Sector’s Bullish 2024 Outlook, Led by Generative AI

Tech Sector’s Bullish 2024 Outlook, Led by Generative AI

by internationalbanker

By Alexander Jones, International Banker

 

In the end, 2023 turned out to be a golden year for tech investors. Having defiantly reversed course from a disastrous 2022 that saw the Nasdaq Composite Index (COMP) shed one-third of its value, the technology-stock-focused benchmark US index rebounded spectacularly to finish last year 43 percent higher, thus making 2023 one of its three best-performing years over the last two decades. As such, despite tech firms facing excruciating conditions, such as spiralling inflation and aggressive rate-tightening, only a year ago, confidence has resoundingly returned to the sector and raised investors’ hopes that 2024 will be filled with stellar gains once more.

Indeed, with confidence growing virtually every day that further rate hikes are not on the immediate horizon, investors have been willing to commit progressively larger amounts to the tech sector. “Once you have a Fed that’s backing off…in terms of rate hikes, you can get back to the business of pricing companies properly—how much money do they make, what kind of multiple do you put on it,” Kevin Simpson, founder of Capital Wealth Planning, told CNBC in late December. “It can continue into 2024.”

Regarding the specific tech areas likely to flourish this year, it should not be surprising that artificial intelligence (AI)—specifically, generative artificial intelligence (GenAI)—is leading the resurgence in confidence for the sector. 2023 was a breakout year for large language models (LLMs)—models, such as ChatGPT, Microsoft Copilot and Google’s Bard, that use machine learning (ML) and deep learning (DL) techniques to understand and generate new text content—as they demonstrated to the world the utility they possessed for improving the user experience, business efficiency, customer service and much more.

This success was perhaps no better demonstrated than by Nvidia Corporation’s spectacular year. A market leader in chips for AI and GenAI applications, Nvidia’s share price soared by 239 percent during 2023, reaching a high of 505.48 just before closing the year out. “Startups are racing to build disruptive products and business models, while incumbents are looking to respond,” Nvidia’s chief executive, Jensen Huang, said in March 2023. “Generative AI has triggered a sense of urgency in enterprises worldwide to develop AI strategies.” And with January seeing that 2023 high eclipsed after revealing new graphics processing units (GPUs) for AI-powered laptops and computers, as well as new automated driving systems adopted by electric-vehicle companies, the expert chipmaker is set to scale dizzying new heights in 2024.

Similarly, portfolio managers don’t expect the AI trend to lose steam this year. “As I look to 2024 and beyond, AI is clearly not the only big trend driving the sector, but it is perhaps one of the most potentially transformative ones,” Adam Benjamin, sector portfolio manager at Fidelity Investments, wrote on December 12. “That said, for investors, the key may be not just to follow the trend, but to identify the various stages of AI adoption that may play out, and to identify timely opportunities at attractive valuations along the way.”

Franklin Templeton Investments’ forecast for the tech sector in 2024, meanwhile, is for “above-market growth”, largely underpinned by strong expected demand for generative-AI applications, which will mostly reach the “application” stage for enterprise businesses this year. “We’re currently in the ‘buildout and experimentation’ phase—a period of high research and development intensity and capital expenditure which benefited semiconductor, hardware and cloud-computing companies in 2023, including several of the so-called ‘Magnificent Seven’ (Alphabet, Amazon, Apple, Meta [Platforms], Microsoft, NVIDIA and Tesla),” the US investment firm explained in December.

And EY (Ernst & Young) has positioned “injecting GenAI into digital transformation strategies” at the pinnacle of its annual ranking of the top 10 opportunities for technology companies in 2024, followed by “experimenting with GenAI in targeted front-office and back-office use cases” in the number two spot. “The opportunity for the year ahead is clear,” Ken Englund, EY’s Americas industry markets leader for technology, media and telecommunications, said in December. “By putting AI at the center of their strategies, tech businesses could leapfrog competitors who were previously ahead, not only by accelerating their transformation journeys but also repositioning operations to capitalize on rapidly emerging technologies and business models.”

That said, with the Federal Reserve (the Fed) focused on engineering a soft landing for the US economy, gross domestic product (GDP) growth is unlikely to be particularly strong this year amidst a challenging climate, as reflected by high interest rates and exorbitant borrowing costs. Indeed, those anticipating an imminent return to the era of cheap capital based on rock-bottom rates prevalent during the 2010s boom era will be disappointed. With much higher rates, the market will likely focus more on demonstrably successful and profitable tech firms with strong fundamentals.

Indeed, Fitch Ratings cited macroeconomic headwinds as the main factor likely to keep a lid on tech performance in 2024 as they disrupt the expected period of inventory correction. “The electronic hardware and semiconductor industries are gradually digesting excess inventories that accumulated exiting the pandemic as the global demand outlook is coming into focus heading into 2024,” the rating firm noted on December 6 as part of its “U.S. Technology Outlook 2024” report. “Lower revenue levels and normalizing input prices are likely to pressure profit margins. Low levels of capital investments among semiconductor makers are unlikely to sustain and could pressure free cash flow margins.”

With GenAI still in its early development stages, one can reasonably expect peak performance from the sector to be realised well beyond this year. “There is clearly a lot of discussion, publicity and, at this stage, even hype around generative AI. I believe generative AI has the potential to be transformative in the long run,” Fidelity’s Adam Benjamin contended. “However, because of its complexities—which include identifying use cases, and building and training models—generative AI likely will not be able to deliver these benefits overnight. Rather, it may take many years for most enterprises to implement AI into their workflow.”

Regarding other technologies expected to shine in 2024, look for strong progress in blockchain-powered applications, particularly given US regulators’ final approval of bitcoin exchange-traded funds (ETFs) in January. And as several Layer 0 blockchains—those that represent the foundational layers of the technology, such as Polkadot, Avalanche and Cosmos—continue to experience exponential growth in activity, 2024 may well be the breakthrough year for “interoperability” of applications seeking to work across many platforms.

“By 2024 and beyond, the advancement of blockchain interoperability protocols will mark a major shift by breaking down the existing silos between different blockchains,” according to David Schwartz, chief technology officer of Ripple Labs. “This shift will enable diverse blockchain platforms to seamlessly interact by sharing data and value transfer, creating a unified and more efficient blockchain ecosystem. The role of interoperability protocols will be crucial in this transformation, as they will increase innovation, as well as foster new applications and use cases, specifically in DeFi [decentralised finance].”

And despite still being early in the development cycle, quantum-computing applications are also taking giant evolutionary strides that will undoubtedly draw tech investors into the burgeoning space in increasing numbers. According to Niels Nielsen, founding partner of quantum-inspired early-stage venture-capital fund 2xN, the first “undeniable demonstration of useful quantum advantage” is set to debut this year.

“We expect this demonstration to be in computational chemistry, on a use case relevant to pharma or materials engineering, which is why we have made investments in companies like QSimulate and Kvantify,” Nielsen explained in industry publication The Quantum Insider. “This will be a turning point for the sector, and we expect it to generate an in-flux of funding, especially into companies developing the application layer for quantum computing, with established customer relationships.” Nielsen also highlighted the “integration of AI with quantum computing”, which began last year as another promising area, with quantum-computing techniques increasingly adopted to improve current generative-AI models.

To gain exposure to the tech sector this year, exchange-traded funds can be convenient for accessing several stocks through a single investable instrument. Among the largest funds with $60 billion in assets under management (AUM), the Vanguard Information Technology ETF (VGT) tracks the performance of the MSCI US Investable Market Information Technology 25/50 Index, made up of stocks of large, mid-size and small US companies within the information-technology (IT) sector. This includes stocks of companies serving the electronics and computer industries or manufacturing products based on the latest applied sciences. Confined to US tech stocks only, VGT’s largest five holdings are Apple (21.49 percent), Microsoft (19.77 percent), NVIDIA (4.20 percent), Broadcom (3.86) and Adobe (2.11 percent).

 

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