James (Jim) T. Tierney, Jr., Chief Investment Officer, Concentrated US Growth: We’ve seen this kind of concentration in the past, but we’ve never seen it concentrated so tightly in one industry—technology. Recently though, the market has started to broaden out—the 10 largest stocks contributed 104% of the S&P 500’s return from January through May, but through July, they contributed 69%. This is benefiting active management. If you look back to three previous years when most of the return came from just 10 names, there’s some good news—the year after this happened, the pendulum swung back, and the market broadened out.
Q: Excitement over AI has been a big catalyst for the technology and internet titans. How should equity investors approach the AI trend?
Ben Ruegsegger, Portfolio Manager—Sustainable US Thematic Equities: We’ve been invested in AI for about 10 years and have held a position in one of the major chipmakers, for quite some time. But part of what we do for our clients is to look beyond that. We look at the entire ecosystem to find companies that are enablers of this technology. For example, AI is very energy intensive and many companies are looking for energy-efficient ways to deploy the technology. Companies like those in the power semiconductor segment will benefit over time from the proliferation of AI but are not necessarily in the spotlight for investors today.
Jim: At some point, investors will become far more skeptical of the AI ramp up. So, we must really dig in to determine which companies have real AI business models and which ones just have an AI halo. Beyond the small number of companies that enjoyed a big boost this year, we need to search for the real beneficiaries of AI. Do you believe that seven or 10 companies will monopolize the benefits of AI, or is AI a productivity tool that helps everybody? When implemented strategically, AI could generate big productivity improvements, which translates into cost savings and enhanced earnings. Over time, it could lead to a reduction in demand for labor—which is a big constraint in the US economy today. This, in turn, could lead to lower inflation and lower interest rates. So, there are many knock-on effects to AI that the market hasn’t even started to discount, and over time, I think that will benefit the broader market—not just the top 10.