Will Artificial Intelligence Stocks Continue to Dominate in 2025? Here's What History Says.

In the last two years, artificial intelligence (AI) has attracted more investment interest than any other theme. To me, the real start of the AI frenzy was November 30, 2022. That's the day OpenAI released ChatGPT to the world.

Since then, the S&P 500 index (SNPINDEX: ^GSPC) has gained 49% while the tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) has surged by 75% (as of market close on Dec. 11).

During times like these, it is easy for investors to fall into the trap of bubble psychology, believing that the market will continue to go up in perpetuity. A related topic for this phenomenon is called the Greater Fool Theory -- an idea that explores the notion of investors paying a premium for assets because they think prices will continue appreciating, causing someone else (the greater fool) to pay even more.

In the piece below, I'm going to break down how influential megatrends have fared in years past. I will also examine historical capital market performance after similar periods of rapid growth.

Could AI stocks be on the cusp of breaking out even further in 2025, or are you about to become the Greater Fool? Let's find out.

Focused view: How have recent megatrends fared?

In my opinion, the last big megatrend before 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 myriad use cases for blockchain, two of the more common applications sit in the worlds of cryptocurrency and fintech.

Although the idea of blockchain has been floating around for decades, I'd argue that the technology only became mainstream over the last 10 years or so. In the chart below, I've benchmarked a number of blockchain exchange-traded funds (ETF) against the S&P 500 and Nasdaq over the last several years.

BLOK data by YCharts.

As you can see, the Amplify Transformational Data Sharing ETF actually performed relatively on par with the Nasdaq and even outpaced the S&P 500 since 2018. Moreover, the First Trust Indxx Innovative Transaction & Process ETF's return of 59% is quite impressive in its own right. Let's take a look at what is actually in these ETFs before jumping to the conclusion that blockchain is a superior opportunity to that of the broader market.

• Amplify Transformational Data Sharing ETF: According to the fund's website, some of the ETF's largest holdings include Core Scientific, Galaxy Digital Holdings, Coinbase, MicroStrategy, Robinhood, and PayPal. The biggest outlier on this list, by far, is MicroStrategy -- which has gained nearly 3,000% since January 2018. The primary 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 appreciates, shares of MicroStrategy tend to follow suit.
• 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, Intel, Micron, and Advanced Micro Devices. What's a little ironic about this one is that many of the stocks listed above have negative returns since the beginning of 2018. But similar to MicroStrategy's outlier influence explored above, AMD's gain of nearly 1,200% over the last several years (thanks in large part to AI) has helped the overall performance of this ETF.

Image source: Getty Images.

Big picture view: What does history tell us?

In addition to exploring megatrends, I think it would also be worthwhile to assess the historical performance of the capital markets in a broader sense. While AI is a ubiquitous technology that can serve all industries, the majority of stocks that have gained so far from the movement reside in the technology realm. For this reason, I will first be looking at how the tech-centric Nasdaq Composite index has fared over the years.

Since its inception in 1971, the Nasdaq has only generated consecutive years of negative returns on two occasions. Of note, this has not occurred in over 20 years. This dynamic suggests that the Nasdaq should continue gaining in 2025.

Below, I've shown the respective gains between the S&P 500 and Nasdaq Composite since the beginning of the current bull market (Oct. 12, 2022). With a chart like that, I wouldn't be surprised if you're at least considering trimming some exposure to equities. After all, how much higher can the markets actually climb?

^IXIC data by YCharts.

Well, apparently the answer is much higher. Generally speaking, the S&P 500 continues to soar both in the near term and long term after reaching an all-time high (such as 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 blockchain, such cases were few and far between. And candidly, the two outliers I explored (AMD and MicroStrategy) are not inherently blockchain specialists.

Moreover, timing was also a big factor in whether or not you made any money in these funds or the individual stocks that comprise them. Although I would not say that blockchain is a "bad" investment per se, I wouldn't necessarily encourage investors to buy shares in many of the stocks I specifically called out above.

While past performance is not a guarantee of future results, history is giving us a pretty clear indication that the Nasdaq and S&P 500 should keep moving up throughout 2025.

My takeaway from the analysis explored here is that while the markets will likely rise next year, not all megatrends or the companies involved with them are created equal. If you want to invest in AI stocks, I'd encourage buying shares in players that are already established or passive index funds that hold more mainstream opportunities as opposed to speculating on what stock could be the next to break out.