From the studio

Podcast: Investors' Club – US tech valuations, monetization, and AI sensitivity (12 min)
Video:CIO Monthly – Kiran Ganesh on the AI rally and navigating market highs (3 min)

Thought of the day

Tech shares have come under pressure this week amid concerns over the sustainability of the artificial intelligence (AI) rally, with the Nasdaq on track to record its biggest weekly loss since May. A flurry of negative headlines related to AI’s development and chip demand dampened investor sentiment at a time when tech performance tends to be sluggish.

But while we think investors need to be mindful of the risk of a period of “capex indigestion” following several years of robust spending from major tech companies, we continue to believe that exposure to AI will prove key to portfolio growth over the medium and longer term.

AI solution providers are making good progress converting usage into revenue, and we believe the scope to monetize will expand further. For instance, tech giants are charging for AI-powered personalization tools used by retailers to enhance customer experiences, and levying subscription fees for access to AI-enhanced tools. Examples like this have translated into robust revenue growth for cloud providers, with the three largest platforms posting average year-over-year growth above 25%. We believe the scope to monetize will expand further, especially as domain-specific use cases broaden and are embedded more deeply in business processes.

We are confident that tech companies will ultimately earn an attractive return on the investments they make. One way to think about the potential opportunity is as a function of the percentage of tasks in the economy that AI might automate, the labor share of those tasks, and the share captured by AI vendors. In the context of the roughly USD 100 trillion global economy, if we broadly assume that around one-third of tasks can be automated by AI, the labor share of those tasks is around half, and AI vendors are able to capture around 10% of the value, this makes for an annual AI revenue opportunity of around USD 1.5 trillion. Estimates of cumulative global AI capex from 2022 to 2025 of USD 780bn and 2026 capex spending in the USD 500bn range do not seem outlandish to us when set against this potential revenue stream.

We expect the equity bull market to remain intact. The extent of the AI-driven rally has prompted some questions about whether stock markets are currently in a bubble. Valuations are high compared to traditional measures’ long-term averages, but price-to-earnings (P/E) ratios for today’s tech giants are far lower than for the tech firms at the peak of the dotcom bubble. We believe valuations are backed by strong earnings growth, and companies continue to beat expectations. Additionally, one of the typical causes of historical bubbles "popping”—higher interest rates—looks unlikely to materialize in the short to medium term, and investor sentiment does not appear overly bullish.

So, while investors shouldn’t be complacent about bubble risks, we remain optimistic about the potential for AI to continue to surpass expectations over time. The AI trend makes long-term investment increasingly important, and we recommend a balanced positioning across tech industries amid the ongoing tug of war between cyclical headwinds and structural growth. Investors can also consider structured strategies to navigate volatility ahead.

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