For two and a half years, the theme of artificial intelligence (AI) has dominated global markets. As the disruptive force powering a fourth industrial revolution, there have been valid reasons behind the soaring value of AI’s enabling and foundational sectors and companies.
Yet, a transition to a new age is never straightforward. Political and economic uncertainties, as well as new challengers, are now testing the AI thesis. This more volatile AI world underlines the importance of an active approach, enabling investors to capitalise on the ongoing positive trend while avoiding the pitfalls.
The AI opportunity is still in place
There are strong reasons for confidence in the secular themes around digital transformation and AI. AI maintains its potential to disrupt the market by fundamentally changing the way businesses operate, as well as paving the way for new industries to emerge. If 2024 was a year when enterprises evaluated the effectiveness of AI, then 2025 could see an ‘AI ripple effect’ where enterprises more broadly adopt the technology and integrate it into their business models.
At the same time, an AI arms race is playing-out between the mega-cap technology companies in the US. Four of the biggest technology companies have already pledged to collectively spend more than USD 300 billion to build out their artificial intelligence capabilities in 2025, a significant uplift on 2024’s already high AI spend1. Recently, investors have begun to express doubts about the sustainability of this trend looking farther down the road and are pricing in a slowdown in investment. Anticipation of an uneven growth trajectory seems prudent in our view, but we would caution against overreaction to near-term noise clouding perspective on potentially one of the most disruptive innovations in a generation.
AI continues to develop quickly, and new releases continue to unlock new capabilities, from advanced reasoning to image and video generation. These ongoing iterations will create economic efficiencies for companies across a broad range of sectors, as well as creating new uses for consumers.
Priced for perfection
A consequence of AI’s meteoric rise since late 2022 is that the valuations of many AI-related companies began 2025 priced for perfection, leaving these stocks highly sensitive to any unexpected news flow. And so far, 2025 has been a year with lots of shocks and surprises.
Right now, financial markets are dealing with forces that are not directly linked to the usual short-term economic factors, particularly in the US where the Trump administration’s economic strategy is creating nervousness among investors. It is well documented that uncertainty in an economic context (such as around the rules of international trade) and fiscal policy can weigh on sentiment, with companies delaying investment decisions and consumers postponing big-ticket purchases. A knock-on effect could see US growth slow.
A second unexpected turn of events came from China, where a previously unknown start-up presented a large language AI model whose efficiency and performance challenged that of the leading US models. Initially, this new launch sparked doubts about tech sector valuations and the dominance of US companies in AI. However, such breakthroughs could also speed up the adoption of AI, creating more demand overall. In other words, AI models would be subject to the Jevons paradox, the effect named after English economist William Jevons, who observed in 1865 that technological breakthroughs leading to the more efficient use of coal ultimately increased the overall consumption of coal.
Against such a rapidly changing backdrop, it is unsurprising that markets have expressed some unease. While technology stocks may have been at the forefront of these volatility episodes, the current situation is very different to the dot.com era, which eventually led to a market bubble bursting. At that time, tech valuations were often double those of the market average and the overinvestment in infrastructure was born by companies that could ill afford underutilisation. This time, the valuations of the biggest companies are close to the rest of the universe2 and well below previous peaks. Furthermore, the tech companies leading the investment in AI infrastructure are doing so with a portion of their annual cash flow; not tapping capital markets to fund the capex and not even drawing down cash levels on their war chest balance sheets.
Yet, investors need to remain mindful of the various risks and challenges for the AI theme over the long term. These include earnings expectations moving too far ahead of reality and geopolitical risks – especially in regions with sensitive semiconductor technology – which could pose a threat to supply chains. Finally, for such a dynamic and innovative theme, there is always the risk that disrupting companies could face disruption themselves. On the upside, when markets exhibit a ‘shoot first, think later’ response, the subsequent mispricing can be advantageous for investors.
Beyond AI enablers and foundational technologies
The companies leading the AI theme continue to offer many positive and durable attributes for investors. They have strong core businesses, can generate high amounts of free cash flow, and have the means to fund capital expenditure without necessarily incurring additional debt. They are also often supported by numerous competitive advantages like network effects or economies of scale.
At present, these leaders represent the enablers of AI, who offer the infrastructure (cloud computing hosts) or expertise that allows adopters to develop and deploy AI solutions. Or they provide the foundational technologies – such as semiconductors and other key components. However, other industries and sectors are also benefiting from the roll-out of AI.
In software, for example, developers are leveraging generative AI to help them autocomplete code, which is dramatically increasing their productivity. These companies are also embedding AI into their products to make them more useful for customers through AI agents.
Industrial companies are diversifying their product lines to build liquid cooling solutions to help resolve heat issues within data centres or improve energy efficiency. AI data centres are so energy-intensive that access to power is becoming a major concern in many regions, boosting demand for renewable and clean energy supplies.
Cybersecurity will also have to be reinforced to avert the threat of bad actors harnessing AI tools. With AI models increasingly acting autonomously and interacting with each other, machines also need to be identifiable and authenticated so that the right models are talking to each other and are protected.
Importantly, the growth of AI and its increasing rate of adoption shows that investing in disruptive technology doesn’t have to be a single-sector theme. There are lots of potential winners beyond those in the technology sector, with opportunities among consumer, industrial, healthcare and financial companies underlining the way new technology is transforming our world.
Harnessing the breadth of disruptive opportunity
With AI development moving forward at breathtaking speed at the same time as world events evolve rapidly, it requires skill to distinguish between the companies that can ride this wave of disruption while avoiding those who stand to be the victim of it.
At BNP Paribas Asset Management, our Disruptive Technology strategy combines multiple perspectives to pick out the best opportunities in the innovation space. Despite its technology focus, it invests in companies across potentially all sectors as long as those businesses are either leading or benefiting from advances in technology. The expert team stays alert to ongoing risk factors and remains confident in the long-term opportunities for innovative solutions set to thrive in the new world order.
[1] Amazon stock earnings cloud AI spending
[2] Talking Heads: Watch out concentration risk ahead
