The start of the artificial intelligence (AI) boom lifted the broader stock market out of a slump in late 2022. It’s been a mostly fun ride since then, and the reality is that AI is only getting started. Experts widely believe that AI technology will create trillions of dollars in economic value over the coming decades and make new industries possible, and that likely means wealth for those who own the right stocks.

Thus far, Nvidia (NVDA 0.52%) has been a humongous AI winner. The stock has returned an eye-popping 956% since the start of 2023. But why stop there?

I predict that Nvidia will continue to outperform the broader market (S&P 500 index) over the next decade, and it’s for some straightforward reasons why.

Image source: Getty Images.

Historical data doesn’t bode well for the broader market

While I don’t think Nvidia’s stock will rise another 956% over less than three years, outperforming the market boils down to what Nvidia is likely to do versus the S&P 500. Some historical data can help paint a picture of how the popular U.S. market index might perform over the next decade.

The AI-driven rally over the past few years has baked some future growth into the broader stock market, as evidenced by an increasingly higher valuation. The S&P 500 currently trades at a forward price-to-earnings (P/E) ratio of just under 22.

Earlier this year, Charles Schwab, using data from Bloomberg, published a report that plotted the S&P 500’s 10-year performance from various starting valuations throughout history. Generally speaking, the higher the S&P 500’s initial valuation, the worse the market tends to perform over the subsequent decade, and vice versa. That shouldn’t be a shock; overpaying for stocks often has that effect.

Many decades that began with the S&P 500 at similar valuations to its current level have produced little to no returns, and in some cases, even negative returns. That doesn’t guarantee the market will do poorly over the next 10 years. For example, AI could drive higher earnings growth over the next decade.

Still, at the very least, history suggests the market’s expensive valuation could weigh on returns over the coming years.

AI growth opportunities are bound to continue

Now that you know what Nvidia is up against, it’s time to see why the company could continue to thrive.

Simply put, a generational investment cycle is underway in AI today. Companies are investing billions of dollars in data centers and other areas to develop and train more advanced AI models and utilize them on a worldwide scale. According to McKinsey & Company, data center expenditures alone could top $7 trillion by 2030.

Nvidia has come to dominate the market for AI chips used in data centers, with an estimated 92% market share. Even if competitors chip away at that high market share over time, it’s difficult to envision Nvidia falling off the map at this point. The company’s hardware and CUDA programming platform have proven a formidable competitive moat.

In the future, Nvidia will have the opportunity to participate in emerging industries that AI makes feasible, including humanoid robotics, a potentially massive opportunity that CEO Jensen Huang is already well aware of.

Thanks to such immense growth, Nvidia’s valuation still leaves room for future outperformance

Often, when a stock’s value increases rapidly, it inflates its valuation and diminishes its future potential. That could be a concern with a stock like Palantir Technologies.

But Nvidia is a rare exception. The company’s revenue and earnings have mostly kept up with the stock price:

Data by YCharts.

Analysts estimate Nvidia will grow earnings by an average of nearly 29% annually over the long term, which is plenty of growth to justify the stock’s current P/E ratio of 47. In other words, Nvidia’s valuation leaves ample room for business growth to translate to investment returns.

Unless Nvidia’s business implodes and falls well short of expectations, there’s a good chance that Nvidia produces double-digit annualized returns over the next decade, even if growth falls a little short of current long-term estimates. When you compare that to an expensive S&P 500-themed ETF and what historical data says about similar instances (lower future returns), it becomes clear that Nvidia can continue to outperform the broader market.