Investors can consider augmenting their equal-weight exposure with specific technology exposure, given our view that the considerable rally in tech stocks could go further. (Shutterstock)

Over the past year, investors needed to be nimble in US equities. Quick shifts in the US macroeconomic story, the speed of progress and monetization in artificial intelligence, and the bottoming-out of smartphone and PC end-markets led to sharp dispersion among the members of major US indexes.


Yet, we still see AI-related opportunities across a range of software, internet, and semiconductor stocks. So, we share three ways for investors to review, rebalance, and reposition tactical US equity positions in equal-weighted US stock indexes (on top of strategic market-cap-weighted positions).


Optimize technology exposure and consider structured strategies.

Since we believe the rally in tech stocks could go further, we recommend investors augment equal-weight exposure with specific technology exposure. Additionally, structured strategies could be used to build or maintain tech exposure and reduce the threat posed by a market retreat. For instance, capital preservation strategies can provide upside participation and limit losses if held to maturity. Typically, these strategies have been particularly attractive when interest rates are elevated and implied equity volatility is low. Since we expect lower interest rates as well as the potential for higher volatility later this year, we believe current conditions provide an opportunity to lock in such strategies.


Consider switching equal-weight exposures into US small-cap stocks.

US small-cap stocks have attractive relative valuations and provide exposure to resilient US domestic activity. We believe they have scope to outperform in a soft-landing base case scenario as well as a “Goldilocks” scenario of resilient activity, faster falls in US inflation, and pre-emptive Federal Reserve rate cuts ahead of the November presidential elections. For example, the forward price-to-earnings ratio for the small-cap S&P 600 index is only 14x. This ratio is lower than its 10-year average of 17x, and is a 30% discount to the valuation for the large-cap S&P 500 index.


Look at longer-term opportunities in technology disruptors and beneficiaries.

From an investment perspective, the longer-term beneficiaries of AI can be broken down into four areas: infrastructure and input providers (cloud), hardware (GPU manufacturers), operators and enablers (large language models), and application beneficiaries (text generation, programming, image/video generation). Based on Bloomberg Intelligence data, we now expect global AI demand to grow from USD 28bn in 2022 to USD 420bn by 2027—a 72% annual growth rate and a fifteenfold increase in just five years.


Recent company product and earnings announcements in the software sector have provided a peek into AI’s monetization potential. For example, new “copilots” are being rolled out rapidly. These are AI companion tools integrated within office workflow software that boost employee productivity and perform tasks that range from finding information to creating content. The ability to charge additional monthly fees for copilot add-ons gives subscription-based software companies an expanded scope for AI monetization.


With the recent strong performance of a handful of mega-cap tech stocks, we believe it is important for investors to maintain a diversified exposure to the sector, including selecting among our preferred tech stocks.


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