Recently, there has been quite a bit of concern that AI could lead to a stock market crash. One theory is that mass white-collar layoffs and disruption of software-based business models could send shares down significantly.
Now, I’ve explored this scenario in a few articles lately because I do see it as a potential risk. But today I want to look at the other side of the coin – what if AI actually results in a massive stock market rally?
Higher profits could boost stocks
In the short term, I definitely see the potential for a rally. This is because AI is likely to enhance company profitability significantly.
As companies automate tasks with the technology and replace human workers with AI agents, costs are likely to drop sharply. And when costs drop, profits tend to rise.
What drives share prices? Profits.
So, we could be in for a nice move higher in the years ahead. If corporate profits are rising, there’s a good chance that the market will rise too.
Chips are driving the market higher
What about the job losses though? Surely this hits consumer spending and the stock market in the years ahead?
Well, it could. But here’s the thing.
Today, chip stocks like Nvidia and Broadcom (NASDAQ: AVGO) are a major part of the market. Chips are now more than 20% of the S&P 500 index, up from less than 10% a year ago.
If these companies continue to see high demand for their products in the years ahead (which I think is very possible), they could continue to drive the market higher.
It’s worth noting that we’ve seen this dynamic play out this year. Looking at the S&P 500, there are tons of stocks that are down 10% or 20% this year.
Yet the index has moved higher. Because chips have pushed it up.
How can investors capitalise?
Given this potential for a move higher, investors shouldn’t bail on the stock market, in my view. Ultimately, there’s a decent chance that major indexes could move significantly higher in the years ahead.
Chips stocks could do even better, given the role of semiconductors in the AI revolution. So, I think it’s worth having material exposure to this area of the market.
One chip stock I’ve been buying for my own portfolio recently is Broadcom. It specialises in custom AI chips.
It’s seeing spectacular growth at present – its most recent earnings showed 106% growth in AI revenues.
I expect the growth to continue in the years ahead because this company is directly supplying some of the biggest spenders in the AI space (eg, Meta and Google).
And with the stock trading on a forward-looking price-to-earnings (P/E) ratio in the low 20s, I like the long-term risk/reward proposition. Taking a three-to-five year view, I think there’s potential for attractive returns.
Of course, there are no guarantees that it will do well. A slowdown in AI infrastructure spending is a risk.
I think it’s worth considering though. In my view, there’s a lot of growth potential.
Should you invest £5,000 in Broadcom right now?
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Edward Sheldon has positions in Nvidia and Broadcom.
