S&P 500 posts historic 2-month rally as AI trade hits overdrive

The S&P 500 just completed one of its best two-month runs in history, powered by an AI-driven rally that has reshaped sector leadership and drawn fresh capital into semiconductor and infrastructure stocks.

The S&P 500 surged through May to cap one of its best two-month stretches on record, fueled by artificial intelligence spending that has lifted semiconductor stocks and broadened into Asian supply-chain beneficiaries.

"The magnitude of this rally reflects a structural repricing of AI-related earnings power, not just speculative momentum," said Michael Wilson, chief equity strategist at Morgan Stanley.

Technology and communication services led the advance, with the S&P 500 information technology sector gaining more than 12% over the two-month period. Semiconductor stocks were the standout: Intel Corp. shares surged more than 220% year-to-date, while Advanced Micro Devices Inc. traded around $500 to $518 in late May after reporting first-quarter revenue of $10.25 billion, up 38% from a year earlier. Data center revenue at AMD jumped 57%, highlighting the scale of AI infrastructure buildout.

The rally has pushed valuations to levels that leave little room for error, with the S&P 500 trading at roughly 21 times forward earnings. The next catalyst comes in June, when the Federal Reserve's rate decision and updated economic projections will test whether equities can sustain their momentum.

The advance has broadened beyond the largest US chipmakers. Investors are rotating into Asian suppliers of server components, cooling equipment and power infrastructure, betting that the next wave of AI spending will create a new class of winners. The pending initial public offerings of SpaceX, OpenAI and Anthropic could inject as much as $70 billion in additional AI spending on top of the more than $750 billion already committed by hyperscale cloud operators, according to IG International market analyst Fabien Yip.

South Korea's Samsung Electro-Mechanics Co. and Japan's Ibiden Co. are among the top performers on MSCI Inc.'s broadest Asia equity index this year, as money managers seek exposure to electronic component makers and semiconductor materials suppliers. Even Japanese toilet maker Toto Ltd., which supplies ceramic materials for chipmaking equipment, has drawn attention from AI-focused investors, Yip said.

AI Capex Cycle Broadens Beyond Chipmakers

The shift reflects growing unease with valuations among the biggest semiconductor names. Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and SK Hynix Inc. have all joined the trillion-dollar club on AI-driven demand, prompting some fund managers to look further down the supply chain.

"We're currently underweighting semiconductors in our Asia technology strategy and focusing more on the electronic component makers," said Ken Wong, an Asian equity portfolio specialist at Eastspring Investments Hong Kong Ltd.

BNP Paribas Asset Management's Song Zhe said the next leg of the rally "should be stock-specific, not a blanket semiconductor trade." His team is focused on advanced packaging, substrates, testing, optical connectivity, power, cooling and server-related companies across Taiwan and China.

Power Infrastructure Emerges as the Next Bottleneck

The supply of electricity to data centers has become a key investment theme. Nuclear and alternative energy stocks have rallied as operators race to secure power for expanding AI computing clusters. South Korea's HD Hyundai Energy Solutions Co. and Daewoo Engineering & Construction Co. are among the top performers in the country's benchmark index this year.

Jian Shi Cortesi, a fund manager at Gam Investment Management, called power "the most under-owned bottleneck" but cautioned that the next phase of the AI frenzy carries bigger risks. If AI demand fails to justify the scale of capital spending, companies may cut capex, leaving the market with excess infrastructure and sharp valuation declines.

The S&P 500's two-month surge has been accompanied by a decline in the Cboe Volatility Index, which fell below 15 in late May, reflecting diminished hedging demand. Trading volume on US exchanges ran about 10% above the 20-day average during the period, according to exchange data.

The rally has also drawn cross-asset support. The US 10-year Treasury yield held near 4.2% in late May, providing a stable rate backdrop for equities, while the Bloomberg Dollar Spot Index edged lower, easing pressure on emerging-market stocks. Gold traded near $2,350 an ounce, holding onto gains from earlier in the year.

This article is for informational purposes only and does not constitute investment advice.