Seize the AI opportunity

Many investors have added some AI exposure over the last couple years. But the rapid pace of the AI sector's expansion means this may still represent an underallocation at the portfolio level. We believe AI will remain a key driver of equity market returns for several years. Investors should use any near-term volatility to build long-term positions, particularly in AI-linked semiconductors, US megacaps, and China's internet leaders. Structured strategies may allow phasing into markets at lower entry levels, subject to investors’ ability and willingness to bear the particular risks of options.

Despite investor concerns over the sustainability of hyperscaler capex and monetization, key AI enablers in chip design and fabrication continue to guide for strong earnings growth across a multi-year outlook, backed by significant financial commitments and capacity expansion. As the industry shifts to more advanced AI models with reasoning capacity ("Think, then answer"), we anticipate another rise in inferencing load, boosting demand for the enabling layer. We favor semiconductor companies driving AI infrastructure at data centers and at the edge.

Given the megacaps’ dominant industry positions and significant AI investments, we anticipate the “big will get bigger” in the AI era. We think investors should position in these tech oligopolies that are present across the entire technology stack, covering chips, cloud computing, and generative AI models and applications. Increased capex is unlikely to dent big tech’s ability to generate strong free cash flows overall, in our view, which is expected to grow from USD 413bn this year to USD 522bn in 2025. An anticipated rise in AI monetization should help megacap tech firms deliver earnings growth of 15-20% on average over the coming quarters, with the market likely to be less rewarding for firms that do not demonstrate as clear a path to earning returns on their AI investments.

While US tech giants have led the AI wave, China’s tech monoliths are also competing to roll out next generation AI models and AI-enabled services across their consumer platforms. Chinese tech valuations have risen after a multi-week stimulus-led rally, but remain well below their historical averages prior to the pandemic. The rally has eased back amid lingering near-term concerns around US-China tensions, tariffs, and tech export controls. Still, with China’s largest tech companies continuing to invest heavily in AI, we expect a distinct domestic AI ecosystem that will help drive profit growth in the long-term.