Inside Markets — Third Phase of AI Trade

The AI theme in equities is evolving as markets begin to recognize the incremental revenue/margin opportunity for software providers. The AI arms race continues with no slowdown in hyperscaler capex but markets have already recognized a good amount of future earnings power for AI-themed semi and network equipment companies. There’s also been a good amount of attention on data center infrastructure and power generation beneficiaries. While this is going on, investor views on the transformational power of gen AI remains highly skeptical. The focal point for the skepticism has been on ROI given the massive investment associated with the buildout. Of course, all major technology revolutions start with high expectations followed by a period of disillusionment before productivity improvements are realized and the general public accepts the new reality. The key for investors is to recognize the moment when productivity improvements begin. Judging from last night’s earnings reports, the moment is upon us and the next phase of the AI theme will be led by software companies selling the improved productivity.