When looking for equities, investors must consider whether AI is going to boost growth sufficiently in the targeted sector.

With wealth managers fretting over whether equities – especially Big Techs with a strong AI element – are overvalued, Bank J Safra Sarasin argues that investors are too optimistic about future earnings growth.

Equity gains this year are only likely to be “moderate,” the Swiss firm said in a note.

"Concerns about an AI-driven bubble are top of mind for investors. Capital spending has surged, with a lot more expected over the coming years. While AI-generated revenues remain modest, the expectation is that they’ll grow as companies embed AI into operations – boosting productivity and profits across sectors," it said. "Our analysis suggests the S&P 500 is pricing in around 1.7 percentage points (pts) of annual US productivity gains from AI – which would be an optimistic outcome. Our macro analysis suggests a more realistic baseline of 0.6 percentage points. That does not imply an equity correction, but it does signal more limited returns ahead, with annual index gains set to trail earnings growth."

“US equities have risen by about 70 per cent since ChatGPT was launched in November 2022. Without AI, the S&P 500’s market cap would likely be $10 trillion lower. Future earnings growth needs to rise by 7 percentage points to justify a $10 trillion market cap premium today,” Raphael Olszyna-Marzys, international economist and Wolf von Rotberg, equity strategist, said. “Our central scenario points to 0.6 percentage point annual productivity gains over the next decade, with a plausible range of plus/minus 0.2 percentage points.”

The bank said productivity gains of more than 1 per cent would require AI, via robotics, to “deeply penetrate all sectors,” even manual and physical ones like construction. That is a “a plausible but not the most likely scenario over the next decade,” it said.

“Within equities, we prefer companies and sectors that are effectively adopting AI, rather than those that merely supply the infrastructure, with upside potential extending well beyond US tech stocks,” Bank J Safra Sarasin said.

A variety of firms have sought to work out the wisest asset allocation course into this year. There appears to be a certain divergence between calls to shift some assets out of the US to the rest of the world, and those who say that despite concerns about a weakening dollar and the impact of tariffs, the US is their preferred market.

Among recent examples, Cambridge Associates, a US-headquartered investment firms, has said investors should embrace diversification, embrace AI “thoughtfully,” be underweight the US dollar and overweight global equities outside the US.

An concern for investors is “concentration risk,” as the “Magnificent Seven” stocks represent a third of the S&P 500’s market cap, a record high (these are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla).

In 2025-26, capex in the artificial intelligence space is slated to be in the region of $450 to $500 billion. Return on invested capital is about $13 billion. Actual returns are far off justifying the outlays, requiring a massive revenue growth becoming reality, the Brunner Investment Trust, a UK trust, told this news service last November.

(To see an outline of how this publication is tracking asset allocation and related investment ideas this year, see here.)