- Investment Strategy Analyst
United States, Intermediary
Change
AI is the acronym on everyone’s lips (including ours), and for good reason. The tech sector has been the backbone of equity outperformance for some time now (particularly in the US) and AI has the potential to transform this sector for the more powerful and productive.
The rapid rise of AI has driven equity valuations up, fueling both unease and optimism. The AI-wary have drawn comparisons to the bubble-bursting dot-com era. The AI-exuberant are quick to point out today’s leaders are delivering not only the promise of innovation but also profit.
Figure 1 compares global price/earnings (P/E) ratios to net margins. The current ratio is in line with the average of the last 20 years, suggesting that equity valuations aren’t falsely inflated, but supported by stronger fundamentals. So, to those who fear AI is a bubble — an area of the market whose asset prices rise quickly to levels that exceed its actual value, then contract sharply — we say, fear not.
Figure 1
The scale of AI investment is unprecedented and the transformative potential of this technology across virtually every industry (and everyday life) is massive. This said, not all AI players will be winners.
What this means for investors
In our view, there are a few things to consider when it comes to seeking out the potential beneficiaries of AI investment:
- Infrastructure: Despite the massive scale of AI investment, infrastructure is already constrained. For example, there aren’t enough data centers offering the computing power needed to support AI expansion at the rate we’re going. To deliver on AI investment, further infrastructure buildout is required. What’s more, ramping up the infrastructure will require expansion in non-tech sectors, like utilities and energy, too. So, the infrastructure component of AI may have positive investment impacts further afield.
- Fundamentals: US growth is increasingly tied to AI. Infrastructure spend and tech earnings have supported GDP and equities, offsetting a tariff-induced drag we would have likely seen otherwise. The US economy has become more reliant on its already dominant sector, tech. This raises the stakes for the narrative of US exceptionalism. The higher a sector flies, the harder it could fall, so it’s important to be prudent about AI and tech allocations, focusing on quality and fundamentals.
- Ripple effects: Selection beyond tech is key. Many companies outside the tech sphere have already begun to adopt AI in their workflows and processes, though broad benefits have yet to manifest. This said, we see green shoots that are likely to blossom into greater return on AI investment as adoption accelerates and more companies integrate the technology more creatively across myriad industries.
- Big-picture thinking: Although public equities seem to get the most attention within markets and AI investment, the AI opportunity set extends across asset classes. In private markets, investments in nascent AI companies present long-term growth opportunities, for example, while in fixed income, AI is driving demand for utilities and infrastructure-linked credit. This speaks to the need for cross-asset expertise in AI investing — not just an understanding of the technology itself. An active approach with access to deep wells of research and broad-based capabilities may help investors take this kind of more holistic approach to this innovation.
What could change our minds
While we’re confident AI and the tech sector aren’t presently in bubble territory, we’d be remiss not to mention what we’re watching that could alter our outlook:
- Capex vs returns: Massive AI spend could deliver strong returns or risk overcapacity and falling return on investment.
- Strategic cross investments: These harken back to dot-com era loops and remind us of the downside risks inherent in dependent ecosystems.
- US Federal Reserve (Fed) policy: The interest-rate path today is more supportive than in the dot-com days; however, if it changes — perhaps because of tariffs or knock-on effects of the OBBBA — bubble risks could rise.
The bottom line
In our view, AI is driving real market value, and investors who can view the opportunity set through the lenses we’ve identified above may be poised to discern potential winners and losers.
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional or accredited investors only.
