Nvidia and Unexpected AI Winners Shine in 2024 Stocks

In the first half of 2024, Nvidia emerged as the standout performer on the S&P 500, leading the index with an impressive 150% return. While Nvidia was the obvious choice for top stock, several other less anticipated players also surged as the S&P reached a record high. This performance includes stocks from sectors typically seen as underperformers in the current macroeconomic environment.

Nvidia’s remarkable growth has seen its market capitalization soar from $1.2 trillion to over $3 trillion, fueled by a 600% increase in annual profits and its pivotal role in the generative AI revolution. The company’s GPUs, which drive much of the current AI advancements, have solidified its position as the S&P’s top performer, repeating its success as the leading stock in both the first half and full year of 2023.

In addition to Nvidia, Super Micro Computer stands out with the highest year-to-date return of 188%. However, it’s worth noting that Super Micro’s gains were realized before it joined the S&P 500 on March 18, with its stock dropping more than 15% since then.

The top ten performers on the S&P 500 also feature other AI-related companies and unexpected winners. Micron ranks seventh with a 55% return, while CrowdStrike holds the ninth spot with a 51% return. Eli Lilly, a key player in the GLP-1 weight loss drug market, is in fifth place with a 57% return.

The year has also been favorable for several lesser-known power providers. Vistra ranks third with a 119% return, Constellation Energy is fourth with a 73% return, and NRG Energy is eighth with a 52% return. These utilities, traditionally seen as underperformers in high interest-rate environments due to their heavy reliance on debt, have defied expectations. Their success can be partly attributed to increased demand from AI data centers, illustrating how the AI boom is influencing various sectors beyond technology.

The utilities sector has emerged as the third-best performer among the S&P 500’s 13 sectors this year, delivering nearly an 11% return. This performance trails only the information technology sector, which includes Nvidia and Super Micro, and the communication services sector, featuring companies like Netflix and Meta. Both of these sectors are heavily involved in AI, making their stocks significant beneficiaries of the AI surge.

The utilities sector’s resurgence is notable given its dismal performance in 2023, where it was the largest loser, falling 10.6% while the S&P 500 gained 26%. High interest rates, the highest in the U.S. since 2001, had previously dampened earnings across the sector. For instance, NextEra Energy saw a 30% drop in first-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) compared to the previous year. Additionally, higher interest rates have attracted investors to higher-yielding government bonds, making utility dividends less appealing. Despite these challenges, the broader stock market has defied traditional expectations that high interest rates lead to poor returns, with the S&P 500, Nasdaq, and Dow Jones all hitting record highs in 2024.

The Wells Fargo Investment Institute, in its midyear outlook published in June, downgraded its rating on the utilities sector, deeming it unfavorable. Senior global market strategist Sameer Samana noted that the utilities sector is among the least likely to benefit from the AI boom’s secondary effects. According to Samana, it will take years for utility companies to expand their capacity to meet any new demand from AI applications, suggesting that there are more immediate ways to capitalize on the AI revolution.