The AI Trade Is On! Why Investors Are Pouring Into Equities Again

Stocks are booming, again!

While tariffs are continuing to dominate news headlines (eg President Trump announced another 50 percent import tariffs on steel), US stocks have rebounded hard from their April lows.

Look at the top 10 companies globally (by market cap, end-May). To make it to this elite list these days requires a market cap exceeding $1 trillion! The last time the entry level soared this high was December 2024, amidst the post-Trump election euphoria.

Berkshire Hathaway (US:BRK.A), the conglomerate headed by veteran investor Warren Buffett, is the second non-tech company to join the ‘trillion-dollar club’. The other is Saudi Aramco, the national oil company of Saudi.

Seemingly, investors are projecting a rosy future (again), despite the higher tariffs, increased macro uncertainties and wobbly consumer trends.

Source: companiesmarketcap.com (end-May)

Why, you wonder, are investors so bullish on equities? Perhaps they are sticking to TINA: There Is No Alternative. For instance, government bonds are weak in many developed markets. In the US, long-maturity Treasuries are pinned near their long-term floors. Even in Japan, where yields have stayed low for decades, is seeing a persistent surge in borrowing costs. The Japanese 30-year yield is standing near multi-decade highs (see below). Is this Asian export powerhouse facing a ‘Truss-Type’ doom loop? Nobody knows. But surging debt costs are unsettling debt investors.

Hence, some speculative capital has flocked to Bitcoin; some to gold. But, a large percentage, however, is still betting on equities.

It is easy to see why. US tech stocks have almost returned to their Q1 historic highs. The German DAX Index is trading near new all-time highs; as is the FTSE 100 Index. Even the Canadian Toronto Index (S&P/TSX) edged to fresh highs last week (see below). To a casual observer of charts, these stock indices are screaming a roaring bull market.

New highs always attract momentum buyers, which, in turn, reinforces the uptrend. As demand swells, it pushes prices higher and lures more buyers, which raises demand. Prices rise, which……You get the idea. Who wants to buy sinking credit notes (which bonds are) when there is a new party in stocks?

Another point to note is this: The magnitude of the equity rebound since April has surprised many – and left plenty behind. If prices do drift higher from here, this ‘cash on the sidelines’ may need to be deployed. Falling relative returns are a great motivator to buy assets with momentum. Thus adding another impetus to the recovery rally.

Cautious investors, however, would point to the sluggish macro data. The scale of the recent rebound is substantial – perhaps too substantial – to be justified by any improvement in earnings or macro trends. The latest OECD Economic Outlook (3 June) highlights this risk:

Substantial increases in trade barriers, tighter financial conditions, weakened business and consumer confidence, and elevated policy uncertainty all pose significant risks to growth.

Lastly, the surge in long-term bond yields is continuing. High debt costs have economic consequences. But equity investors are too busy on booming equities to notice that.

One sector that remains firmly on investors’ radar is AI. Last week (May 28), Nvidia (US:NVDA) affirmed market expectations on revenue and earnings. Q1 revenue surged 69 percent year-on-year; while net income rose 26 percent (see below). Gross margin remains above a spectacular 60 percent. The chip company delivered these stunning results despite the ongoing US export restrictions. The California-based company is now the world’s second most valuable listed firm after Microsoft.

Source: Nvidia 

The iPhone Moment for AI?

The persistence of AI-engagement for many companies is hard to ignore. One Financial Times columnist, Rana Foroohar, boldly asserts that the “business deployment of artificial intelligence has reached a tipping point.”

The advancement of generative AI is accelerating. The chart below captures this rapid AI improvement to human-level performance. Many Large Language Models (LLMs) are starting to latch on reading comprehensions, image recognition and predictive reasoning. While humans perform better in complex reasoning, many simple tasks can now be conducted by AI systems autonomously.

Source: Oxfordenergy.org

Companies are speeding up the adoption of these AI models. Agent AI is now moving rapidly in corporate technology to improve corporate productivity. Using agents to speed up the completion of task is known as ‘Agentic AI‘.

This AI is progressing from simplistic chatbot-type interactions to serious systems that can solve real-world problems without much human interaction (see explanations below). The program runs iteratively and through reasoning – and a gigantic leap into the unknown. These programs will only become more sophisticated as memory power expands.

Source: Nvidia (blogs.nvidia.com/blog/what-is-agentic-ai/)

AI Stocks To Watch

In view of the quantum leaps in AI technology, investors are continuing to pile into the sector. This technology is most advanced in America; while adoption is deepest. Not surprisingly, that market contains the largest number of AI stocks.

Below are some large-cap AI-related stocks:

Broadcom (AVGO) – A chip designer that recently focussed on AI applications. The stock rebounded sharply from $140 to eye another breakout to all-time highs (see below). At $242, the company is worth a mammoth $1.1 trillion.

Nvidia (NVDA) – By far the leader in the AI sector. Its recent results affirm expectations and new price highs should not be ruled out later this year.

Palantir (PLTR) – The data analytics company has outperformed the market by a wide margin. While prices corrected deeply back in April, prices are surging into fresh highs.

ASML (ASML) – AI requires lots of training. To do that requires the most advanced computer chips. In this niche sector, ASML, one of Europe’s tech stars, sells vital instruments to make these chips. While prices have regressed 30 percent from its peak, the long-term secular uptrend remains intact.

Zscaler (ZS) – the cloud computing stock is turning to AI to improve its products. Investors love its recent results and prices broke out into long-term highs.