Diversify beyond the AI rally

Video: CIO Monthly | Mark Haefele on AI earnings, energy prices, interest rates (4 mins)
Video: Why China's equity markets have lagged (6 mins)
Video: Market Playbook | Why bank stocks are falling amid rising rates (6 mins)
Video: The AI Show |The AI trade's two-sided test (4 mins)

US equities rose on Monday amid a tech-led rally, with the Philadelphia Semiconductor Index gaining 2.8% and the Nasdaq up 0.8%. Tech fundraising was the main focus on Wall Street: Broadcom arranged a USD 63bn deal to finance the purchase of chips, while SpaceX signed a roughly USD 40bn equipment-finance lease transaction. Meta said it increased its equity fundraising to USD 97.5bn, offering a clearer funding plan. Sentiment was also supported by monetization optimism following a filing by a leading AI lab.

Without commenting on individual companies, we believe AI demand should continue to be a key growth engine. The coming days should provide more evidence on the sustainability and monetization of that demand as hyperscalers release their September-quarter results.

But while we maintain a constructive outlook on the structural growth of the AI theme, high expectations and potentially wide differences in company outcomes underscore the risks of single-stock concentration. We think investors should ensure their equity portfolios are broadly diversified, and those seeking long-term growth opportunities should also consider exposure to Power and resources and Longevity.

Structural investment should support Power and resources. Structural demand for the Power and resources theme remains firmly in place, in our view, as investment in AI and electrification increases the need for data centers, power generation, grids, and related infrastructure. An improving automation cycle and stronger metals prices should provide additional support. We favor a selective approach, as markets are increasingly focused on whether companies can efficiently convert strong demand into earnings growth and cash flow. We like businesses with visible multi-year demand, credible capacity expansion plans, disciplined balance sheets, and the ability to protect margins amid elevated input costs and interest rates.

The shift in global demographics should underpin Longevity opportunities. Aging populations and clinical innovation should sustain demand for products and services that extend healthy lifespans. Although recent earnings point to moderating medical procedure demand, low penetration across several end-markets and the sector’s significant valuation reset this year support the longer-term opportunity. We are also positive on obesity treatments, as greater supply and lower pricing are enabling broader patient access. Overall, the combination of shifting demographics, clinical innovation, and expanding and inelastic health care demand underpins our positive view on Longevity.

Global opportunities extend beyond US equities. Strong earnings growth outside the US is also broadening the opportunity set for global investors. We remain positive on Eurozone equities, supported by a recovery in manufacturing, structural investment, and improving operating leverage. In Asia, valuations are at multi-decade lows, while AI investment and a recovery in cyclical activity should support the region’s earnings outlook. Japanese equities should also benefit from AI-related capital spending, cyclical improvement, and continuing corporate reform.

So, we remain constructive on the long-term potential of transformational innovation but favor a diversified approach. Investors should maintain broadly diversified core equity exposure, complement AI holdings with opportunities in Power and resources and Longevity, and broaden allocations across sectors and regions. This approach can help investors participate in structural growth while managing concentration and company-specific risks.