Stocks Break Out as AI Boom Fuels Tech Rally

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Stocks are breaking out to new highs as the Artificial Intelligence boom widens.

The S&P 500 rose 1.2 percent in the holiday-shortened week between Friday, January 12, and Friday, January 19. The index closed at a new all-time high for the first time in over two years. Technology companies associated with AI, like Advanced Micro Devices (AMD) and Super Micro Computer (SMCI), led the surge.

AMD jumped after Barclays cited potential AI growth. The rally widened after Taiwan Semiconductor (TSM), the world’s biggest chipmaker, beat estimates and raised guidance. SMCI, whose machines power AI server farms, said quarterly revenue was about 28 percent above previous forecasts. Nvidia (NVDA), the world’s most valuable semiconductor stock by market cap, also got a boost from Meta Platforms (META).

“It’s become clearer that the next generation of services requires full general intelligence,” CEO Mark Zuckerberg said on Instagram. “We are building an absolutely massive amount of infrastructure to support this,” including a large use of NVDA processors. (Interestingly, META is less than 2 percent below a $1 trillion market cap.)

Microsoft (MSFT) also continued its move to new record territory after Bank of America cited growth from its AI-powered Copilot service. The software giant widened its edge over AAPL, which remains below its previous highs.

Advanced Micro Devices (AMD), weekly chart, showing new record high.

Consumer Comeback

While technology grabbed the biggest headlines, last week also brought significant positive news on the U.S. economy. Retail sales beat forecasts for the sixth straight month and initial jobless claims fell more than expected to a 16-month low. That may suggest there’s little risk of recession despite the Federal Reserve’s aggressive interest-rate hikes.

Consumers have “confidence that inflation has turned a corner,” University of Michigan economist Joanne Hsu said on Friday. Combined with stronger confidence in wages, consumer sentiment had its biggest two-month increase since 1991.

Residential real estate continued its run of positive news as housing starts, building permits and builder sentiment beat expectations. Strong demand and lower mortgage costs are fueling the trend.

Growth Dominates

Biggest Gainers in the S&P 500 Last Week
Advanced Micro Devices (AMD)+19%
Applied Materials (AMAT)+11%
Western Digital (WDC)+9.5%
Broadcom (AVGO)+9.3%
KLA (KLAC)+9.3%
Source: TradeStation Data

Growth stocks like semiconductors and software dominated last week’s move. Communication stocks also climbed as AI optimism lifted Alphabet (GOOGL) and META. Financials and consumer discretionaries inched higher but lagged the S&P 500. Interestingly, TradeStation data showed more members of the index falling last week (266) than rising (237).

Ten of the S&P 500’s 11 best performers were chip stocks. Industrial supplier Fastenal (FAST) was the No. 6 gainer after price hikes and a new Onsite business model drove earnings and revenue past forecasts.

Selling focused on safe havens like utilities, consumer staples and gold miners. Energy kept falling as growing oil supplies offset geopolitical risks. Chinese stocks also declined as the Asian country struggles with weak consumer demand, falling home prices and a shrinking population.

Green-energy stocks struggled and Tesla (TSLA) lost value for the fifth straight week.

S&P 500, daily chart, with key indicators and technical patterns.

Charting the Market

Friday’s close was 0.4 percent above its previous peak and 0.9 percent above its previous record close. The breakout immediately followed a record weekly closing price on January 12.

The index had spent 3-4 weeks consolidating between 4700 and 4800. Wilder’s Relative Strength Index (RSI) hit a three-year high in December but has retreated from the overbought condition. That may give the index more potential to advance.

It bounced at its 21-day exponential moving average (EMA) during that time. The faster 8-day EMA also remained above the slower 21-day EMA, a potential sign of short-term bullishness.

Some traders may think the current situation resembles moments like January 2013 and December 2016. Both times, the index made steady gains after escaping long-term consolidation periods.

Apart from the S&P 500, there are few noteworthy chart signals. The U.S. dollar, Treasury yields and crude oil inched higher last week but have failed to rebound from big slides in late 2023. It could be positive for stocks if they remain under pressure.

The Week Ahead

This week has a lot of earnings and a couple of important economic reports.

United Airlines (UAL) issues results this morning.

Biggest Decliners in the S&P 500 Last Week
Discover Financial (DFS)-11%
First Solar (FSLR)-9.1%
Albemarle (ALB)-8.7%
Humana (HUM)-8.5%
AES (AES)-8.4%
Source: TradeStation Data

Netflix (NFLX), Verizon Communications (VZ) and Johnson & Johnson (JNJ) are noteworthy companies tomorrow.

Crude-oil inventories follow on Wednesday morning. TSLA, AT&T (T), International Business Machines (IBM) and Lam Research (LRCX) report earnings.

Thursday brings the government’s initial estimate of gross domestic product (GDP) for the last three months of 2023. Initial jobless claims and durable goods orders are also due. The earnings roster includes Intel (INTC) and American Airlines (AAL).

Friday’s big item is the personal consumptions expenditures (PCE) inflation index. Other items include results from American Express (AXP) and pending home sales.

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