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US equities ended last week at fresh all-time highs, led by artificial intelligence (AI)-related stocks. With the S&P 500 and the Nasdaq gaining 3.2% and 5.5% so far this month, respectively, investor confidence in the AI trade and tailwind from the Federal Reserve's policy easing have so far defied the typical weak seasonality in September.

We maintain a high conviction in the structural growth story of AI, and recent industry developments suggest that AI adoption may accelerate in the coming years, in our view.

AI adoption continues to grow steadily. The latest US Census Bureau survey tracking AI adoption across more than a million firms in the US showed a steady sequential improvement in the AI adoption rate, which has risen to 9.7% in the third quarter, up from 9.2% in the prior three months. We continue to expect AI to reach the key milestone of a 10% adoption rate by the end of this year, compared with 24 years for e-commerce and five years for smartphones.

Further innovation should propel AI into the next phase of growth. Smartphone penetration jumped to 68% in the five years following the 10% milestone, due to the emergence of a robust ecosystem in the form of app stores, devices offering improved capabilities, and the availability of cheaper alternatives. We think the AI industry could follow a similar trend. With innovation around AI models and cost reductions continuing to play a big role in driving the next wave of adoption, recent progress in reasoning models, commitments from both large and small to medium-sized enterprises, and a growing AI ecosystem mean that we will likely soon enter the next phase of accelerated growth.

AI monetization should continue to increase as adoption rises. AI providers have already made good progress converting usage into revenue, with major cloud platforms posting average year-over-year growth above 25%. We believe the scope for monetization will expand further, and that tech companies will ultimately earn attractive returns on the investments they are currently making. In the context of the USD 100tr global economy, if 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 implies an annual AI revenue opportunity of around USD 1.5tr.

So, while current tech valuations are high, we believe the long-term potential for AI to drive performance remains strong. We maintain a balanced positioning across semiconductors, software, and internet industries, and view any market dips as compelling entry points for long-term investors.

For more details, read our latest Blog: Is AI set to enter the exponential adoption phase?