AI Remains a Key Driver – Selectivity Is Becoming Increasingly Important
Leading US technology companies are set to continue investing substantial sums in artificial intelligence. Increasingly, however, their stock-market performance will depend on whether this spending translates into higher revenues and wider margins.
Dr. Matthias Ramser
- AI investment remains high, but commercial returns will be crucial
- Market rotation is reshaping the investment landscape
- Geopolitics and seasonality are increasing the risk of a pullback
The expansion of the infrastructure required for artificial intelligence remains a major driver of capital expenditure. Semiconductor manufacturers continue to benefit directly from these high levels of spending. For some companies, however, expectations for future growth had already become very elevated. We therefore view the recent share-price declines as a normalization of valuations rather than the end of the AI cycle.
At the same time, we expect value creation to broaden out across the supply chain. In addition to direct infrastructure providers, companies that deploy artificial intelligence productively are likely to benefit to a greater extent going forward. This development could define the next phase of the AI investment cycle. Selectivity therefore remains essential.
One risk lies in the technological competition with China. Recent advances by Chinese providers demonstrate how quickly they can catch up with leading Western models and operate comparable applications at a lower cost. The key differentiating factor will therefore be which companies can convert their substantial AI investments into sustainable growth and rising profits.
Rotation Across the Equity Market
Following a strong first half of the year, equity-market dynamics have shifted. While highly valued US technology and semiconductor stocks have been consolidating since mid-May, market performance is increasingly being driven by other sectors, particularly pharmaceuticals and financials.
We view this development as fundamentally positive. A market supported by a broader range of industries rests on a more stable foundation than a rally dependent on a small number of highly valued companies. At the same time, the rotation demonstrates that broad expectations of future growth are no longer sufficient on their own. Earnings, cash flows and valuations are once again moving to the forefront.
Geopolitics and Seasonality as Risk Factors
Despite the continued constructive market environment, risks remain elevated. In particular, the development of long-term US interest rates warrants close attention. Following the Federal Reserve’s latest decision, US-Treasury yields have continued to rise. A further significant increase in yields could weigh on equity markets.
The situation in the Middle East also remains a source of uncertainty. Any further escalation could affect energy prices and inflation expectations.
In addition, equity-market volatility has historically tended to increase between August and October. This year, the US midterm elections are creating an additional source of uncertainty. In our view, the current low level of investor anxiety should therefore be seen as a warning signal rather than a reason for complacency.
Selectivity and Portfolio Protection
Positive earnings momentum and a resilient economy continue to support the medium-term case for equities. Depending on investors’ risk profiles, we recommend maintaining exposure to the companies that benefit most directly from the AI trend. At the same time, the expected increase in volatility should be used as an opportunity for disciplined rebalancing in order to preserve portfolio balance.
We see the pharmaceutical and biotechnology sector as particularly well positioned. On the one hand, it is benefiting increasingly from the use of artificial intelligence in research and development. At the same time, the sector has a comparatively defensive earnings base should the pace of AI investment begin to slow.
We continue to see a latent risk of escalation in the conflict involving Iran. This risk could increase after the US midterm elections, as domestic political pressure on the US administration to prevent rising energy prices is likely to ease. Against this backdrop, we continue to recommend maintaining exposure to conventional energy companies as a strategic hedge.
Overall, the fundamental environment remains supportive of equities. However, given elevated valuations and growing geopolitical uncertainty, diversification, selectivity and disciplined portfolio rebalancing are becoming increasingly important.
