OpenAI Proves It’s AI’s World. Stock Markets Are Just Living in It.

AI is the stock market this year. It likely will be next year, as well. (AFP via Getty Images)

Key Points

• OpenAI’s deal with Advanced Micro Devices—it is taking a stake in the company and buying chips from it— caused a 24% rally in AMD stock.
• The top seven tech stocks contributed approximately two-thirds of the S&P 500’s 3.65% gain last month.
• Annual AI investments are projected to nearly triple from 2025 to 2030, exceeding $1.2 trillion, according to BofA.

When an unprofitable start-up can add $63 billion in value to one of the world’s biggest stocks by simply announcing a plan to buy its products, you know you are witnessing a powerful force in the market. This one isn’t showing any signs of slowing down.

OpenAI’s latest artificial-intelligence deal—it is taking a stake in Advanced Micro Devices and will buy chips from it— triggered a 24% rally in a stock already carrying a $270 billion valuation. That helped carry both the S&P 500 and the tech-focused Nasdaq Composite to record highs.

It also underscored the dominance of the AI investment theme, both in terms of stock market performance and broader economic growth, heading into the final months of the year and beyond. The Magnificent Seven tech stocks, all of which are tied in some way to the AI investment boom, have only become more important in terms of market performance since the start of the year.

The top seven stocks were responsible for around two-thirds of the S&P 500‘s 3.65% gain last month, according to S&P Dow Jones senior index analyst Howard Silverblatt. They fueled around half of the benchmark’s advance since its early April low and accounted for about 41% of the S&P 500’s nearly 15% gain this year.

Big tech is also set to dominate the third-quarter earnings season, which kicks off next week. Jeffrey Buchbinder, chief equity strategist at LPL Financial, estimates that the market’s top six stocks will be behind around 70% of the 8% growth expected for collective S&P 500 earnings.

“It’s remarkable that companies this big can grow earnings 40—50%
— but several hundred billion in capital spending annually will do that,” he said.

Bank of America, in fact, sees that capex speeding up over the next two years, and into the end of the decade, as the spending so far begins to bear fruit.

“We expect annual investments to nearly triple between 2025 and 2030 to over $1.2 trillion, constrained only by ability to scale buildings and power,” said BofA analysts led by Vivek Arya in a recent client note.

The current AI buildout, funded by cash flows and supported by government buyers in some cases, is “structurally more durable than prior large cycles,” Arya and his team say.

A second positive is that the adoption of AI at the consumer level won’t require people to spend a lot of money to upgrade their devices, BofA says. The absence of that hurdle is likely to accelerate the conversion of spending into earnings for the biggest AI hyperscalers— Amazon.com , Microsoft, Alphabet , and Meta Platforms —while also quickening the pace at which companies outside of tech can boost productivity by using AI.

Right now, earnings forecasts aren’t fully reflecting that optimism. LSEG data suggest investors see collective S&P 500 profits at just over $304 a share next year. That puts the benchmark’s current valuation at around 22.1 times forward earnings.

Six months ago, markets were looking for 2026 earnings in the range of $307 a share, with a multiple of just 17.6 times. That suggests the run-up in stocks since the early April lows hasn’t been matched by expectations for longer-term improvements in earnings growth.

Valuations have taken off, largely as a result of AI momentum. And multiples are likely to keep rising, thanks in part to expected Federal Reserve interest-rate cuts, favorable tax treatment on AI investments from the One Big Beautiful Bill Act, and a resilient domestic economy.

It all adds up to more gains ahead for stocks, moving into the fourth year of a bull market that began in October of 2022, and was supercharged by the launch of OpenAI’s ChatGPT the following month.

“We don’t think the AI boom in equities has run its course, despite how far it has already come,” said John Higgins, chief market economist at Capital Economics. “We therefore expect the U.S. stock market, in particular, to charge ahead over the rest of this year and next, with other tech-heavy markets—such as China’s—not too far behind.”

Write to Martin Baccardax at martin.baccardax@barrons.com