Will Artificial Intelligence-linked Shares Persist in Preeminence in 2025? Insights Gleaned from Past Trends.
Over the past two years, artificial intelligence (AI) has seen an unprecedented surge in investment interest, surpassing all other themes. For me, the turning point was November 30, 2022, when OpenAI introduced ChatGPT to the world.
Since then, the S&P 500 index and the tech-heavy Nasdaq Composite have experienced significant growth. As of Dec. 11 market close, the S&P 500 has seen a 49% increase, while the Nasdaq Composite has surged by an impressive 75%.
During periods like these, investors may be susceptible to bubble psychology, believing that the market will perpetually climb. This phenomenon is often associated with the Greater Fool Theory - the idea that investors pay a premium for assets, anticipating further appreciation, with the belief that another investor (the greater fool) will pay even more.
In the following text, I'll examine the performance of past megatrends and how they fared in the market, providing insight into AI's potential future. Is AI on the brink of further breakthroughs in 2025, or could you be falling victim to the Greater Fool Theory? Let's delve into the data.
Perspective on recent megatrends
Before AI dominated the scene, the most prominent megatrend was blockchain technology. In essence, blockchain acts as a giant, decentralized ledger for transactions. Typically, this technology is employed in the fields of cryptocurrency and fintech.
Although the concept of blockchain has been around for decades, it really came into mainstream use over the past decade. For illustration, I've included a chart below comparing various blockchain exchange-traded funds (ETFs) to the S&P 500 and Nasdaq Composite over recent years.
From the chart, you can see that the Amplify Transformational Data Sharing ETF performed nearly on par with both the Nasdaq and S&P 500 since 2018. The First Trust Indxx Innovative Transaction & Process ETF has delivered a striking 59% return over this period. Before concluding that blockchain is a superior investment opportunity, let's examine the contents of these ETFs.
- Amplify Transformational Data Sharing ETF: This fund's largest holdings include Core Scientific, Galaxy Digital Holdings, Coinbase, MicroStrategy, Robinhood, and PayPal. MicroStrategy stands out as the fund's most significant outlier, having increased nearly 3,000% since January 2018 largely due to its adoption of Bitcoin as an asset.
- First Trust Indxx Innovative Transaction & Process ETF: Some of its largest holdings include JD.com, Baidu, Alibaba, Intel, Micron, and Advanced Micro Devices. Interestingly, many of these stocks have actually seen negative returns since 2018. However, the stellar performance of Advanced Micro Devices, bolstered by its AI developments, has significantly contributed to the ETF's overall performance.
Historical market perspective
In addition to analyzing individual megatrends, it's essential to examine historical capital market performance following periods of rapid growth. While AI is a versatile technology with applications in various industries, the majority of its gains have been realized in the tech sector.
Given that AI stocks are predominantly tech-centric, I've chosen to focus on the Nasdaq Composite index's performance over time. During its 51-year history, the Nasdaq has recorded only two consecutive years of negative returns. The last time this occurred was over two decades ago. This trend suggests that the Nasdaq is likely to continue climbing through 2025.
Below, you can see the returns from both the S&P 500 and Nasdaq Composite since the current bull market commenced on Oct. 12, 2022. It's not difficult to see why some investors might be considering trimming their equity exposure - the markets have witnessed impressive growth.
However, history has shown that the S&P 500 and the Nasdaq Composite tend to continue rising both in the short and long term following all-time highs.
In conclusion
When it comes to investing in megatrends, the results are certainly mixed. While there have been standout performers in blockchain, these instances are relatively rare. It's also worth noting that the two outliers I've mentioned, AMD and MicroStrategy, are not strictly associated with the blockchain sector.
Moreover, timing has been a crucial factor in determining whether or not an investor realized a profit on these funds or the individual stocks they contain. While blockchain is not necessarily a poor investment, I wouldn't advocate purchasing shares in many of the specific stocks I've highlighted.
Although previous achievements don't guarantee future success, the trend seems to suggest that the Nasdaq and S&P 500 are set to carry on climbing through 2025.
From my perspective, the insights reviewed suggest that while the markets are expected to grow next year, not all mega-trends or the firms associated with them are of equal value. If you're inclined to invest in AI stocks, I'd recommend purchasing shares in established players or passive index funds that focus on more mainstream investments, rather than betting on which stock might be the one to explode next.
In the world of finance, individuals who invest in AI-related companies might be drawn to the Greater Fool Theory, expecting the market to continue climbing. However, it's crucial to conduct thorough research and not rely solely on this theory to make investment decisions.
During periods of rapid growth, such as the current tech boom, it's important to consider the performance of past megatrends, like blockchain technology. For instance, the Amplify Transformational Data Sharing ETF, which primarily invests in companies related to blockchain, has seen impressive returns since 2018. However, not all blockchain-related stocks have performed similarly, highlighting the importance of careful evaluation before investing money.
