Similar to 2023, investors in the first half of this year have bet heavily on the prosperity of AI. They drove stocks up 150%, pushing the market cap of this graphics chip manufacturer over $3 trillion, briefly becoming the world's most valuable company.$NVIDIA (NVDA.US)$According to S&P Dow Jones Indices, as of Wednesday, Nvidia has contributed 30% of the total return of the S&P 500 index, including dividends. Along with Alphabet, Microsoft, Meta Platforms, and Amazon, these companies have accounted for the majority of stock market index returns in the USA.

NVIDIA's rise is one of the main reasons for the 15% increase in the S&P 500 index this year, almost matching last year's astonishing first-half gains, despite a series of high inflation data hitting investor hopes for the Fed to begin cutting interest rates.

Investors originally thought that the central bank might cut interest rates in half this year and were optimistic about the outlook for the stock market. But data over the next few months showed that inflationary pressures were still continuing and the Fed has yet to cut interest rates.

This shift has pushed up bond yields, with the yield on the 10-year U.S. Treasury note rising from 3.860% at the end of last year to 4.287% on Thursday. Rising yields often dampen investors' enthusiasm for taking on stock market risk. But in the first half of 2024, the eager pursuit of the future prospects of artificial intelligence took the upper hand, pushing the S&P 500 index to 31 record closes.

Many investors feel optimistic about entering the second half. Strong corporate profits have eased signs of inflation, enhancing the market's hope that the Fed will cut interest rates this year. Nevertheless, there are also reasons why the stock market may stagnate. If the central bank continues to maintain interest rates, the market may lose patience. The election between President Biden and former President Trump may cause volatility, and traders may react ahead of the possibility of policy changes. Overvaluation may make the stock market more vulnerable to setbacks of any kind.

According to S&P Dow Jones Indices, as of Wednesday, Nvidia has contributed 30% of the total return of the S&P 500 index, including dividends. Along with Alphabet, Microsoft, Meta Platforms, and Amazon, these companies have accounted for the majority of stock market index returns in the USA.

Holly MacDonald, Chief Investment Officer of Bessemer Trust, said: "Clearly, AI is a huge driver for some of the large tech companies. It's not just the hype around AI, it's actually what we're seeing impact the performance."

NVIDIA's stock soared 9.3% after it posted record quarterly earnings on May 23, implying that the AI boom is not abating. Microsoft's results beat analysts' sales expectations, as demand for its software and cloud computing services were boosted by AI.

Amazon has become the fifth U.S. company to reach a market capitalization of $2 trillion, and CEO Andy Jassy has refocused the company's focus on AI innovation. Recently, Meta launched a new AI tool for advertisers. Google is rolling out an AI-driven search engine response.

Many investors see the prospects for a transformative technology that will boost productivity and growth leapfrog.

"We believe we're just beginning the multi-year bull market phase of AI," said Mona Mahajan, senior investment strategist at Edward Jones.

NVIDIA's surge has prompted some on Wall Street to compare it to the tech bubble, while many investors point out that the company's stunning financial performance proves that the stock price increase is reasonable.

Despite this, some signs of a potential bubble are causing concern for some observers. May brought the return of "Meme" stock trading, a phenomenon that drove Wall Street crazy in 2021. GameStop's (GME.N) stock price rose in association with social media accounts such as "Roaring Kitty" on YouTube and "DeepF—ingValue" on Reddit.

After regulators approved a wave of retail funds, Bitcoin hit a new record high, exciting cryptocurrency enthusiasts. Investors are flooding into the junk bond market, indicating that they are not worried that economic slowing will lead to increased defaults and bankruptcies.

Although artificial intelligence may ultimately affect companies throughout the economic sector, recent trades have been more limited to certain companies. The equal-weighted version of the S&P 500 index lagged behind the benchmark index by the largest margin in decades, indicating the extent to which large tech stocks are driving the market's development.

Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, said that technology has become an "all-weather investment." On the one hand, concerns about the slowing growth of cyclical industries prevent investors from buying these stocks. On the other hand, technology stocks have benefited greatly from the strong spending on artificial intelligence.

"Technology enables you to both defend and attack," she said.

The rebound of a few stocks has made some investors nervous. Nvidia's stock may experience significant volatility, having fallen 13% for three consecutive trading days earlier this month, which may be a potential warning signal for investors.

Ben Pace, Chief Investment Officer of Cerity Partners, said, "We do need other stocks in the market to show enough earnings growth to participate in this bull market."

Pace believes this scenario will occur: his firm invested earlier this year in an exchange traded fund that tracks the equally-weighted version of the S&P 500 index.

According to FactSet data, analysts expect S&P 500 index companies' profits to grow 11% this year, with all industries except for energy and materials achieving growth. Next year, with the help of all 11 industries in the S&P 500 index, they expect earnings to grow by 14%.

Another reason to be cautious: stocks don't look cheap. According to FactSet data, the S&P 500 index's trading price this week is about 21 times expected earnings in the next 12 months, close to its highest price since January 2022. The 10-year average level is about 18 times.

Marcelli said, "This already reflects a lot of good news, which makes the market quite sensitive to setbacks."