Artificial intelligence stocks surged in the third quarter, with a basket of 38 AI stocks rising 15.7%, outperforming the overall stock market and the US Technology Index. Corning and Teradyne were top contributors, with 66% of the basket outperforming the market, trading at a 16% premium to fair value estimate.

The Morningstar AI basket includes hardware firms like Taiwan Semiconductor, hyperscalers like Amazon, and software firms like Salesforce. The basket aims to represent a cross-section of the AI universe, with a focus on AI server infrastructure, cloud businesses, and software firms benefiting from AI advancements.

Top performers in the AI basket included Corning, Teradyne, Arista Networks, and Alphabet. Corning, Teradyne, and Arista benefited from AI data center buildouts, while Alphabet saw a rally due to the Google Search antitrust case outcome. Samsung Electronics also saw a rise in stock price.

Despite a strong quarter, some AI stocks finished in the red, including Salesforce, ServiceNow, and Adobe. Generative AI and competition pressure Adobe, while generative AI poses a threat to Salesforce’s core business. Adobe and Salesforce trade at a discount to their fair value estimates, while ServiceNow is considered fairly valued.

The rally in AI stocks inflated valuations, with the average price/fair value estimate ratio rising to 1.16 in the third quarter. This means the average stock in the AI basket now trades at a 16% premium to its fair value estimate.

Read more at Morningstar: AI Stocks Post Big Gains in Q3. These Are the Winners and Losers