Getty Images; Jenny Chang-Rodriguez/BI
It's looking like the AI hype will continue for a third consecutive year.
The technology has polarized investors and market experts across Wall Street, with some believing it'll completely transform the economy and others believing it's creating a stock-market bubble ripe for popping.
Regardless of what you think about AI, it's had an undeniable impact on the market. Hardware, Big Tech, anything data-center-related — investors who bet on these areas of the market this year reaped handsome rewards.
But technology advances fast, and today's AI playbook may very well become outdated in the new year. Business Insider compiled views from four Wall Street firms to see what some of the most influential financial institutions think about the future of AI. Here's what Wall Street is predicting about the technology and how you can update your portfolio.
If there's one thing that AI proponents and naysayers can agree on, it's that the technology is expensive to produce.
Building data centers, stocking up on GPUs, powering AI — all of that doesn't come cheap. In 2024, Big Tech companies poured mind-boggling amounts of capital into building out AI infrastructure. By the end of the year, it's likely that Alphabet, Amazon, Meta, and Microsoft will have spent $222 billion on AI capital expenditures, which is a 50% increase from last year, according to UBS.
But that's just the tip of the iceberg, according to some Wall Street firms.
According to BlackRock's 2025 outlook, "major tech companies are starting to rival the U.S. government on research and development spending."
"We estimate spending on this infrastructure could top $700 billion by 2030, equivalent to 2% of U.S. GDP," the asset manager added.
Expect continued investment in data centers, chips, and power systems as AI models become more complex. That means investors who bought into the picks and shovels AI trade in 2024 should stay invested, UBS argues.
Going into next year, the bank recommends looking into utilities, as the electricity providers fueling AI data centers are seeing a steady uptick in demand. Examples of utilities funds include the Utilities Select Sector SPDR Fund (XLU) and the Fidelity MSCI Utilities Index ETF (FUTY).
AI investing in 2024 was largely defined by what Goldman Sachs calls the Phase 1 and Phase 2 trades of AI infrastructure. Investors flocked to Nvidia, the superstar Phase 1 stock, as well as the Phase 2 AI picks and shovels, including data centers and other semiconductor companies. While those trades are clearly still hot, there'll be new opportunities to invest in AI as more use cases emerge, many on Wall Street believe.
2025 will see a widening field of investment opportunities, particularly in so-called Phase 3 companies that are monetizing AI and using it to boost their revenue streams, Goldman Sachs says. The bank has identified 11 stocks that are using AI to increase their revenues, per their last quarterly earnings calls. They include ACV Auctions, Commvault Systems, Cloudflare, Datadog, DigitalOcean, Dynatrace, Fortinet, Gartner, Hubspot, Mastercard, and ServiceNow.
UBS also highlights a few areas of the market in particular for investors to keep an eye out for in the coming years. "We expect successful generative AI applications across a range of industries, including in health care, cybersecurity, and fintech," UBS said.
US stocks have outperformed global markets in 2024 thanks in large part to AI.
The large sums being spent on AI are paying off for US companies. According to Apollo, the US has more data centers than all other major countries combined, giving it a significant advantage in the industry.
"The US is experiencing a surge in corporate and research spending on the back of the artificial intelligence (AI) revolution—a dynamic not seen in other developing nations or even China," Torsten Sløk, chief economist at Apollo, wrote in the firm's 2025 outlook.
Robust AI investment may be part of the reason why the overall US economy has performed so well.
"The federal government's investments in green energy and infrastructure, along with private sector investments in AI, have been crucial to the nation's economic resilience," Sløk added.
The boom in construction from building AI infrastructure, as well as the ongoing energy transition to power data centers, is a powerful tailwind for the US economy and the AI trade going into 2025. For that reason, BlackRock is betting on US equities going into 2025.
"We think the AI mega force will benefit U.S. stocks more and that's why we stay overweight, particularly relative to international peers such as European stocks," the asset manager wrote in its 2025 outlook.
Some examples of US-based AI funds include the Xtrackers Artificial Intelligence and Big Data ETF (XAIX) and the iShares US Technology ETF (IYW).
AI could have an overlooked benefit to the stocks in your portfolio: it could lower inflation. The technology has the potential to usher in a new era of labor and productivity gains for the economy, according to BlackRock and UBS.
As more companies adopt AI tools, routine tasks will be automated and new business models will be implemented. That'll lead to decreasing inflation as the supply of goods and services increases, thanks to automation. This won't be an instantaneous change, but rather one that slowly emerges over the next few years, UBS said in its 2025 outlook.
That's a promising side effect of AI, especially as the Federal Reserve has battled to bring inflation down in 2024 and some economists speculate that inflation could remain elevated in the long term.
"If AI's potential can be realized, we believe it could augur a productivity revolution and contribute to lower prices for various goods and services and higher rates of economic growth," UBS said.
"For investors, at a macroeconomic level, we believe the AI revolution is likely to help lower inflation, boost growth, and therefore result in higher real interest rates in the years ahead," the bank added.
