Without taking any single-company views, CIO stays positive on the AI trend, maintaining their preference for big tech given their advantageous market positions. (UBS)

AI infrastructure spending is likely to pick up further. During the December 2023 quarterly reporting season, we saw upward revisions to 2024 data-center spending, driven by strong AI infrastructure capital spending by big tech companies. Since then, evidence of rising AI demand points to broadening spending trends, and we see a chance that our current global data-center capex estimate of USD 300bn in 2024 may prove conservative. Last week, Taiwan Semiconductor Manufacturing Co (TSMC) revealed that AI-driven high performance computing has become the largest contributor to its revenue. The company said the AI outlook was positive, with AI chip demand growth likely hitting a five-year compound annual growth rate (CAGR) guidance of 50%.

More evidence on AI monetization is emerging. German software company SAP this week reported a 25% growth in cloud revenue fueled by AI demand, pointing to a strong AI monetization trend that we expect to see more evidence of this week. Separately, a recent survey across 1.2 million firms by the US Census Bureau showed that AI adoption rose sharply in the first quarter compared to the previous results from the September 2023 quarter. In addition, the report revealed that 12% of surveyed companies are looking to utilize AI.

Tech earnings growth and valuations are both appealing. Last week’s sell-off means global tech is now trading at only 22.5 times 2025 forecast earnings, down from close to 25 times earlier this year. With potential for a better outturn than the sector's estimated 18% year-over-year earnings growth this year, we think the 10% correction in valuations offers an attractive entry point for investors looking for long-term opportunities.

So, without taking any single-company views, we stay positive on the AI trend, maintaining our preference for big tech given their advantageous market positions. We also continue to favor the semiconductors and software segments. For investors looking for diversification within their US tech exposure, we see opportunities in Asian beneficiaries.

Main contributors - Solita Marcelli, Mark Haefele, Sundeep Gantori, Daisy Tseng, Christopher Swann, Jon Gordon, Jennifer Stahmer

Original report - Intact AI fundamentals should drive further tech performance, 23 April 2024.