Amada Agati:  

With another successful earning season for mega-cap companies in the books, it's clear artificial intelligence is a technology with staying power. But where is the opportunity set going forward? In this special edition of "#AddingAlpha," we take a closer look at AI as a megatrend.

Maybe you've heard the phrase, "Data is the new oil." If that's the case, then we would take it perhaps one step further and say AI is the new engine. In other words, now that we have all this data from the proliferation of advanced software and applications, AI is the innovation engine that will put it to practical use.

While the focus of most AI hype has been on the mega-cap companies developing the applications and hardware, the scalability of AI and things like large language models and text-to-video models is still in very early innings.

The productivity of AI is going to be much bigger than just something that helps one semiconductor company or only benefits the mega-cap tech stocks. If anything, we can see a world where AI helps level the playing field for businesses and individuals willing to learn and adapt to this new technology.

While any revolutionary technology is bound to disrupt the status quo, on balance, we expect AI will become a positive secular growth driver. Disruption doesn't equate to negative.

It's just a healthy part of technological evolution. One example we like to cite is how ride-sharing wouldn't have gained any traction without smartphones, and now, Uber is part of the Dow Transports Index.

In the last few earning seasons, we've already heard from companies across a wide variety of industries, from discount chain retailers to even farm equipment manufacturers that are deploying AI into their products.

This is an acceleration of the adoption curve investors should want to see for a long-term megatrend taking hold. We can't have a serious conversation about AI without mentioning Nvidia in the same sentence these days, as Nvidia continues to prove it is in a league of its own in harnessing the AI wave.

Nvidia has seen sales for its AI semiconductor chips grow more than 100% for the past three quarters -- the kind of demand that clearly signals we're entering a new chapter for technological innovation.

The downside of Nvidia's surging popularity is, of course, the concentration risk that comes in the equity market. Did you know 60% of the S&P 500's Q4 earnings growth came from Nvidia alone?

Take Nvidia out, and 2023 earnings go from plus 1% growth into slightly negative territory. And the 2024 estimate goes from plus 11% growth to 9.5%.

We believe earnings drive price in the long run, which is why Nvidia has become so critical to the market's path forward. If we go all the way back to December of 2022, about a month after ChatGPT was publicly launched and the EPS growth estimate for Nvidia was 25% in 2023, followed by negative 54% in 2024 -- 

No, that is not an error, and that is not a typo. The expectation was actually for negative earnings growth for Nvidia in 2024. Fast forward to today, and now those numbers are 259% and 97% respectively. When a mega-cap company has that big of a shift in earnings expectations, you know it's going to move the market, and it certainly has.

It's an exciting time for innovation, and Nvidia is at the center of it, but AI is much more than one industry, let alone one company. As the Nvidia CEO has mentioned recently, this is AI's iPhone moment.

And we interpret that to mean the opportunity set of innovation is only going to accelerate from here. The challenge for an investor looking for exposure to AI, beyond the mega-cap tech group, is that you might not see AI show up as a distinct line item on a company's income statement. But they certainly might be using the technology widely across the firm.

As AI utilization expands to a broader set of companies and the productivity enhancements are felt, particularly through margin expansion, AI should benefit investors more broadly, not just those looking for pure-play AI investments.