Over the past two years, artificial intelligence (AI) has attracted more investment interest than any other theme. For me, the real start of the AI madness was November 30, 2022. That’s the day OpenAI released ChatGPT to the world.
Since then the S&P500 index (SNPINDEX: ^GSPC) has gained 49% while technology is tough Nasdaq Composite (NASDAQINDEX: ^IXIC) is up 75% (at market close on December 11).
In times like these, it’s easy for investors to fall into the trap of bubble psychology, believing that the market will continue to rise forever. A related topic to this phenomenon is called the Greater Fool Theory – an idea that explores the idea that investors pay a premium for assets because they think prices will continue to rise, causing someone else (the bigger fool) to pay even more.
In the piece below I will explain how influential megatrends have fared in recent years. I will also examine the historical performance of the capital market after similar periods of rapid growth.
Could AI stocks be about to breakout even further in 2025, or are you about to become the Big Fool? Let’s find out.
Focused look: how have the recent megatrends fared?
In my opinion, the last major megatrend before the AI mania was the introduction of blockchain technology. A simple explanation for blockchain is to think of it as a giant ledger for transactions. While there are countless use cases for blockchain, two of the most common applications are in the world of cryptocurrency and fintech.
While the idea of blockchain has been floating around for decades, I would say that the technology has only become mainstream in the past decade. In the chart below, I have compared a number of blockchain exchange-traded funds (ETF) against the S&P 500 and Nasdaq in recent years.
BLOCK data by YCharts.
As you can see, the Empower the ETF for Transformative Data Sharing has actually performed relatively on par with the Nasdaq and even outperformed the S&P 500 since 2018. Moreover, the First Trust Indxx Innovative transaction and process ETFThe 59% return is quite impressive in itself. Before we conclude that blockchain represents a superior opportunity to that of the broader market, let’s take a look at what’s actually in these ETFs.
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Amplify Transformational Data Sharing ETF: According to the fund’s website, some of the ETF’s largest holdings include Core Scientific, Galaxy digital holdings, Coin base, MicroStrategy, RobinhoodAnd PayPal. By far the biggest outlier on this list is MicroStrategy – which is up almost 3,000% since January 2018. The main reason for MicroStrategy’s surge is due to the company’s adoption of Bitcoin on its balance sheet. In other words, if the price of Bitcoin rises, MicroStrategy stock will follow suit.
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First Trust Indxx Innovative Transaction & Process ETF: According to the fund’s website, some of the ETF’s largest holdings include JD.com, Baidu, Alibaba.com, Intel, MicronAnd Advanced micro devices. What’s a bit ironic about this is that many of the stocks mentioned above do negative returns since early 2018. But similar to MicroStrategy’s outlier influence examined above, AMD’s nearly 1,200% gain in recent years (largely thanks to AI) has contributed to this ETF’s overall performance.
Image source: Getty Images.
Bigger picture: what does history tell us?
In addition to exploring megatrends, I also think it is worthwhile to assess the historical performance of capital markets more broadly. While AI is a ubiquitous technology that can serve all industries, the majority of stocks that have benefited from the move so far are in the tech space. For this reason, I’ll first look at how the tech-focused Nasdaq Composite index has performed over the years.
Since its inception in 1971, the Nasdaq has posted negative returns only twice in a row. Note that this hasn’t happened in over twenty years. These dynamics suggest that the Nasdaq should continue to rise through 2025.
Below, I’ve plotted the respective gains between the S&P 500 and Nasdaq Composite since the start of the current bull market (October 12, 2022). With a chart like that, I wouldn’t be surprised if you’re at least considering reducing some equity exposure. After all, how much higher can the markets actually go?
^IXIC data by YCharts.
Apparently the answer is much higher. Overall, the S&P 500 continues to rise, both in the short and long term, after reaching all-time highs (like now).
It’s a mixed bag
Given the details above, I’d say investing in any given megatrend is a mixed bag. While there have been some winners in the blockchain space, such cases have been few and far between. And to be honest, the two outliers I examined (AMD and MicroStrategy) are not necessarily blockchain specialists.
Furthermore, timing was also a big factor in whether or not you made money in these funds or the individual stocks that make them up. While I wouldn’t say blockchain is necessarily a “bad” investment, I wouldn’t necessarily encourage investors to buy shares in many of the stocks I specifically mentioned above.
While past performance is no guarantee of future results, history gives us a pretty clear indication that the Nasdaq and S&P 500 should continue to rise in 2025.
My conclusion from the analysis explored here is that while markets are likely to rise next year, not all megatrends or the companies involved in them are created equal. If you want to invest in AI stocks, I recommend buying stocks from already established players or from passive index funds that offer more mainstream options, rather than speculating on which stocks could be the next to break through.
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Adam Spatacco has positions in Coinbase Global. The Motley Fool holds positions in and recommends Advanced Micro Devices, Baidu, Coinbase Global, Intel, and PayPal. The Motley Fool recommends Alibaba Group and JD.com and recommends the following options: long January 2027 calls of $42.50 on PayPal, short December 2024 calls of $70 on PayPal, and short February 2025 calls of $ 27 on Intel. The Motley Fool has a disclosure policy.
