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No one could have guessed at the end of the worst year for stocks since 2008 that an innovation from an unassuming Microsoft -backed startup would sweep in to revitalize a once-booming growth sector. The excitement around ChatGPT has revived the downtrodden technology sector from the grave. Six months later, the promise of generative AI has boosted the Nasdaq Composite 31.7%, notching its best first half since 1983 . Broad enthusiasm around this innovation contributed to the bulk of the market ‘s gains in the first half , lifting dominant AI chipmaker Nvidia a whopping 190% and big technology companies including Meta Platforms 139%. Microsoft and Alphabet have added more than 35% each, while Apple , which recently unveiled its own mixed reality headset , added credence to the metaverse thesis , and closed above a $3 trillion market cap on Friday. While it’s hard for investors who sat on sidelines in this tech-fueled run to shake off regret, those who missed out on what any are calling the next big thing since the internet shouldn’t fear they lost out on the jackpot. The first half’s upside may dwarf the gains to come in the back half of the year, but AI is only in the early innings, warned Ken Mahoney of Mahoney Asset Management. He compared the run-up to what markets saw in the late 1990s. “We’re in very, very early stages,” said Jan Szilagyi of Toggle AI. “It’s going to be a very volatile ride.” Betting on Nvidia Nvidia took Wall Street by storm this year. As a dominant chipmaker creating graphics processing units that underpin large language models, it took home the biggest gains year to date. No matter how AI evolves, Nvidia was seen by many investors as a main beneficiary. Shares surged 24% one day in May as the company offered a blowout forecast fueled by surging demand for AI chips. NVDA YTD mountain It will be difficult for Nvidia to replicate the triple-digit returns it achieved in the first half of 2023. Even with the stock’s stellar performance, and recent entrance into the $1 trillion market cap club, investors aren’t shying away just yet. Future 2023 gains may pale in comparison to the triple-digit jump to start the year, but Wall Street’s consensus price target implies 8% upside from Friday’s close. “What will come in the second half will still be healthy gains,” said Sylvia Jablonski, CEO at Defiance ETFs. “There is a reason to still go into these names, get more from equities than you will cash, but I don’t think Nvidia will move another 100%.” While astonished by the significant surge in Nvidia —and technology shares more broadly — Paul Meeks, portfolio manager at Independent Solutions Wealth Management views the chipmaker as a “special” name every tech-focused manager competing against the benchmarks should probably hold. Although shares look expensive, last trading at a forward price-to-earnings ratio of nearly 56 times, it marks one of the only AI players experiencing a sizeable upward move and also significantly adjusting estimates, he said. Investors looking for a cheaper way to play the AI trend, may want to consider Advanced Micro Devices —what Meeks describes as a “poor man’s Nvidia.” He said it’s poised for growth. Shares are up about 76% in the first half. For those more cautious on Nvidia, Mahoney views Microsoft as a safer way to play the AI trend, given its market position across major tech verticals, including cloud and software. Investors may want to consider scooping up shares on a pullback, he said. A backer of ChatGPT-maker OpenAI, Microsoft surged 42% in the first half and will battle it out with Alphabet for the title of the world’s chatbot leader. He views names like Nvidia and Microsoft as the “picks and shovels” of AI, and said these companies are some of the best ways to play the trend. Mahoney is wary of companies focusing solely on AI and lacking diverse business models, which could be among the first to falter. Early opportunities outside Big Tech While technology stocks may offer the most pure-play way to invest behind artificial intelligence, investors looking for the next big winner may find the best opportunities outside the sector. Jordan Stuart, a portfolio manager at Federated Hermes, offers an example. He expects biotechnology and health-care stocks to benefit from AI tools that enable drug developers to cut research and development costs and potentially bring drugs to market at a quicker clip. It also could help doctors with treatment plans. In the weight loss drug market, dominated by names like Eli Lilly’s Mounjaro and Novo Nordisk’s Ozempic, he views AI as tool that can potentially aid in personalizing doses and monitoring patient responses. “It’s lengthy, it can be dangerous, and oftentimes redundant,” Stuart said of the drug market. “This is where AI use cases can move the needle just a little bit.” While Stuart declined to provide specific stocks to play this trend, numerous drug companies are already working with artificial intelligence. This week Insilico Medicine, a Hong Kong-based biotech, began human clinical trials with a drug that used AI to establish a target and its design. Other likely winners include retail companies already implementing AI to improve efficiency and manage inventory, Mahoney said. Meeks sees potential in old-economy industrial stocks. A market correction ahead? Not everyone on Wall Street expects clear skies ahead in the second half of the year. In fact, while many are calling for the sector and broader market to finish up for the year, they are also bracing for heightened volatility as questions loom over whether the economy will continue to decelerate into a recession. For investors fearing they missed out on 2023’s AI-driven rally, a silver lining could come in the form of a market correction, spurred by volatility, and some profit-taking. “There will be an opportunity to get into some of these stocks at probably better levels than you’re at now,” Szilagyi said. “It is just the nature of markets.”
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