CIOs believe that the adoption of AI will unlock value in many sectors. Large technology companies have further room to grow, and we see the US information technology sector as our favorite, as it has strong balance sheets and strong earnings growth potential, which aligns with our focus on quality.
We believe AI will continue to drive technological dominance in the future.
Tech stocks delivered strong returns in Q1, driven by AI. Among global tech companies, semiconductors posted the strongest returns. We forecast global tech sector revenues to grow 20% in 2024, with AI memory sector revenues growing 55% in 2024 and 35% in 2025. Q1 2024 saw the emergence of promising new AI products, from more powerful GPUs to generative video and coding models.
But the story doesn’t end with AI, big tech companies are also providing quality exposure.
U.S. tech companies have strong balance sheets, a positive at a time of high interest rates and slowing economic activity. Earnings revisions are improving, increasing confidence that key end markets have bottomed. The AI ​​market is expected to be dominated by an oligopoly of vertically integrated “foundries” and monolithic players along the value chain.
We see opportunities for both large and small technology companies.
The rapid growth of the AI ​​industry indicates that many investors are still under-allocated across the board. We favor semiconductor companies underpinning AI datacenter infrastructure and edge chips. We also favor mega-cap tech with exposure to chips, cloud, and generative AI models. Investors can consider exposure with capital preservation strategies that balance upside participation alongside ways to manage potential downside risk.
Did you know that ?
We divide the investable AI universe into a value chain: the enabling layer, which provides the backbone of AI development; the intelligence layer, which turns computing and energy resources into intelligence; and the application layer, which incorporates the tools of the intelligence layer. The artificial intelligence market potential is enormous, and we predict that value creation from AI will reach US$1.16 trillion by 2027. According to FactSet data, 40% of S&P 500 companies mentioned “AI” in their first quarter earnings calls.
Investment Outlook
We view the U.S. information technology sector as our most favorable. Within the AI ​​opportunity set, we like the enabling layer due to its combination of attractive and tangible revenue growth profile, strong competitive positioning, reinvestment runway, and reasonable valuation. We like semiconductor companies that are driving investments in AI infrastructure in the data center and at the edge.
Main contributors – John Gordon and Julian Wee
Original Report – How Should You Invest in Technology?, 24 June 2024.
For more information on artificial intelligence, check out the Chief Investment Office AI content hub.
