Exploring What the Next Chapter of the AI Story Will Look Like
As we see it, the AI debate is shifting from the scale of capital spending to whether that scale will translate into enough productivity gains, revenue and earnings growth to justify it. The investment phase of the AI cycle still seems underway, but investors are increasingly looking to what comes next. Can leadership spread beyond “pick-and-shovel” firms into areas like software and power?
The software sell-off has been broad, but some firms will likely play a role in AI’s next phase. We see the pipeline of initial public offerings as a key test of the market’s appetite for long-term AI growth. What we see now doesn’t yet look like a classic valuation bubble, but lofty earnings expectations may not be met if the sizable capital already deployed doesn’t translate into accelerating earnings.
How Should Investors Consider Positioning Multi-Asset Portfolios?
At the midway point of the year, we think investors should consider the following pathways to maintain resilience while capturing opportunities.
Overweight equities, with a US preference. We think equity exposure should favor the US, with its AI exposure, stronger earnings and profitability and more resilient economy. Emerging markets and Japan offer access to the AI value chain, and earnings revisions are improving in certain sectors.
Build portfolio resilience. As the first-half turmoil highlighted, investors need to think not only about bolstering defenses but doing it with a diverse tool kit. Option-based strategies may mitigate downside while keeping exposure to growth areas. Lower-beta stocks and gold may also help defense. Exposure to the US dollar also helped defend during volatility this year (though our longer-term view is for dollar weakening).
Deploy systematic equity strategies. Markets will likely stay concentrated for a while, which can increase the risk of unintended biases. Systematic equity approaches may help manage these risks while offering potential for outperformance that complements fundamental strategies.
Underweight duration but tap income. Duration could be less diversifying, with stagflation worries and expected tighter monetary policy likely to keep yields elevated, though the market seems too hawkish in the UK. Higher overall yields offer compelling potential for income seekers.
Explore other sources of inflation protection. While stocks may be considered the biggest real asset available, other strategies have the potential to enhance the mix. Real assets, commodities, gold and option protection are building blocks that could help if the energy shock lasts or volatility rises.
From a big-picture perspective, we think a multi-asset approach is well suited to the current environment, providing that it’s disciplined, risk-aware and able to adapt dynamically to a changeable landscape.
