This has been a fantastic year for stocks, starting out on a bright note, with the S&P 500 (^GSPC -0.00%) confirming the market’s presence in bull territory. The benchmark then went on to hit multiple record highs and today is heading for a 26% annual increase. The Nasdaq (^IXIC 0.12%) and the Dow Jones Industrial Average (^DJI -0.20%) advanced too, climbing 32% and 16%, respectively. This plus the fact that more than three-quarters of the 30 Dow Jones Industrial Average stocks are heading for gains this year shows that many industries contributed to this movement.
But one particular area has stood out as the star of 2024, and that’s artificial intelligence (AI). Companies that are helping develop the technology or those using it to improve their businesses have led stock market gains. For example, AI chip leader Nvidia (NVDA -2.25%) and AI-driven software company Palantir Technologies (PLTR 3.92%) have delivered the best performances in the Dow Jones and the S&P 500, respectively.
Now, heading into 2025, you may be wondering if there’s still time to get in on this hot growth area — or if it’s too late. Let’s find out.
Image source: Getty Images.
Why has AI grabbed our attention?
First, let’s talk about why AI has garnered so much attention from investors — and inspired the world’s largest companies to invest billions of dollars into the technology. Meta Platforms (META -1.65%) has said AI was its biggest investment area of this year and aims to increase AI spending next year too. Amazon‘s (AMZN -0.66%) cloud business, Amazon Web Services (AWS), went all-in on AI, offering customers everything from chips to a fully managed service. And Amazon itself uses AI to improve the efficiency of its e-commerce business — one example is designing the fastest delivery routes for packages.
AI has the ability to lower companies’ costs by making their operations more efficient, as well as the potential to help customers develop game-changing products and services. All of this could translate into significant revenue growth for companies developing or using AI — and that generally results in positive stock performance over time.
So it’s not surprising that companies and investors see AI as an area of great potential. In some cases, investment is already bearing fruit. AWS recently reached a $110 billion annualized revenue run rate thanks to the AI products and services it’s been selling to its customers. And Palantir delivered its highest profit ever in the latest quarter as customers piled into its AI-fueled software to help them leverage the power of their data.
Palantir and Nvidia
But, as mentioned, many of these companies leading the AI revolution also have led market gains, and they’ve seen their valuations take off. Good examples of this are Palantir and Nvidia, as you can see in the chart.
PLTR PE Ratio (Forward) data by YCharts
On top of this, the overall stock market has become expensive, with the S&P 500 Shiller CAPE ratio, an inflation-adjusted look at share price in relation to earnings over 10 years, at one of its highest levels ever.
S&P 500 Shiller CAPE Ratio data by YCharts
All of this may lead you to believe that the biggest AI-driven gains are over and it’s too late to get in on this industry. But that’s not necessarily true. Even though AI stocks exploded higher this year, this actually is a long-term investment opportunity — not a short-term one.
Meta chief Mark Zuckerberg earlier this year says he expects to see a “multiyear investment cycle” before scaling Meta’s AI products and services into profitable ones. And Nvidia chief executive officer Jensen Huang says $1 trillion of outdated computer systems exist worldwide and need to be updated for this new phase of accelerated computing. Supporting that, analysts have said today’s $200 billion AI market may reach $1 trillion by 2030.
All of this suggests we’re in the early days of the AI build-out — and that means the revenue gains for companies involved are in the early stages, too.
This is great news for investors because it means there’s plenty of time for us to get in on this exciting industry, and even certain stocks that have soared in recent times still have room to run over the long term. So, this hot investing theme that’s powered the stock market in 2024 isn’t just a short-term fad, but instead could become a valuable part of your portfolio over the long haul.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
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